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6 months ago
Trading Day: Tech rebounds, jobs worries deepen
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
A rebound in U.S. tech stocks lifted the Nasdaq and S&P 500 on Wednesday, but soft U.S. employment indicators kept investors on edge and sparked a rally in Treasuries and gold prices.
More on that below. In my column today, I look at the surprising strength of China’s yuan against the dollar in recent weeks, and argue that it may be part of Beijing’s wider strategy in its trade negotiations with Washington.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. From Tokyo to London, bond investor fears over fiscaldiscipline leave markets on edge 2. Fed rate cuts and doubts over independence to keep U.S.dollar under pressure 3. Google’s AI rivals get a boost from data-sharing order,but tech giant far from routed 4. China’s Xi projects power at military parade with Putinand Kim 5. UK budget speculation adds to risks for the economy
Today’s Key Market Moves * STOCKS: S&P 500 and Nasdaq rise after favorableantitrust ruling for Alphabet. Nasdaq outperforms but Dow,Russell 2000 slip. * SHARES/SECTORS: Alphabet surges 9%, ConocoPhillips-4.4%. Communications sector +3.8%, biggest rise since April;energy -2.3%. * FX: Dollar falls broadly. Biggest decline is a 0.5%slide against Hungary’s forint; in G10 FX space, greenback falls0.4% against sterling and Aussie dollar. * BONDS: European debt remains under pressure butTreasuries rebound. U.S. yields fall as much as 7 bps, curvebull flattens. * COMMODITIES: A new high for gold at $3,578/oz. Oil falls2.5%, biggest fall in a month, as OPEC mulls output hike.
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Today’s Talking Points:
* U.S. jobs
This is a huge week for the U.S. labor market, and therefore the Fed. Most observers agree conditions are softening - the disagreement is over how rapidly, whether interest rate cuts are warranted, and if so, when does the Fed act.
Figures on Wednesday showed job openings fell to a 10-month low in July and there were more unemployed people than positions available for the first time since the pandemic. Weekly claims and July ADP private sector jobs data are out on Thursday, before the big one on Friday - August non-farm payrolls.
* ECB
Euro zone price pressures may be a little hotter than expected, with figures this week showing producer inflation in July and consumer inflation in August above forecast. European Central Bank board member Isabel Schnabel told Reuters there’s no need to cut rates.
Schnabel is at the hawkish end of the spectrum, but markets don’t disagree - the ECB is expected to stand pat next week and all of next year. Further rate cut hopes are fading. Could the next move, whenever it comes, actually be a rate hike?
* China flexes muscles
China held its largest-ever military parade on Wednesday to mark 80 years since Japan’s defeat in World War Two, with President Xi Jinping telling the world it must choose between "peace or war, dialogue or confrontation, win-win or zero-sum." U.S. President Donald Trump called it a "beautiful ceremony".
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The event was designed to flex China’s diplomatic, economic and tech muscle too, not just its military might. As many countries agree to lopsided trade deals with the U.S., the leaders of China, Russia and India are forging closer ties between their nations.
China uses yuan as olive branch in U.S. trade talks
A notable trend this year has been the often-counterintuitive market reactions to U.S. President Donald Trump’s efforts to upend many long-held economic norms. One of the biggest surprises has been the appreciation of China’s yuan.
The consensus opinion at the start of the year was that Beijing would counter Washington’s punitive tariffs on Chinese imports by depreciating the yuan against the dollar. This would keep Chinese goods competitive, enabling the country’s exporters to compensate for any loss of U.S. business.
On top of that, a weaker exchange rate would, in theory, help to reflate China’s economy, pulling it out of the deflationary funk it has been in since its property bubble began to burst in 2021.
And, finally, a weaker yuan would be a poke in the eye to Washington. A key pillar of the Trump administration’s economic agenda, articulated most artfully by adviser Stephen Miran and Treasury Secretary Scott Bessent, is a weaker dollar.
But Beijing surprised everyone.
The yuan did slide to an 18-year low around 7.350 per dollar during the chaos of Trump’s April 2 ’Liberation Day’ tariffs. And combined with low domestic inflation and even deflation in recent years, the yuan’s broad ’real’ effective exchange rate (REER) is the weakest in over a decade.
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But since April, it has reversed course rapidly against the dollar, trading last week at a 2025 high of 7.1260 per dollar.
Indeed, measured by the People’s Bank of China’s official daily fixings or offshore market trading, the yuan just posted its biggest monthly gain against the greenback in almost a year.
These big moves can partly be explained by strong capital inflows. The Shanghai Composite equity index is at a 10-year high, boosted by record net inflows from hedge funds in August. And even though China’s trade surplus with the U.S. may be shrinking, its global surplus in the first seven months of the year hit a new record.
That’s a recipe for a stronger exchange rate.
GOOD FAITH
But with a currency as tightly controlled as the yuan, market dynamics are not the whole story.
The appreciation appears to be a deliberate policy choice by Beijing, potentially hinting at its broader strategy in combating Trump’s tariffs.
On a basic level, this doesn’t make sense. Given the deflationary pressures still weighing on the Chinese economy, why do authorities appear to be actively pursuing a stronger exchange rate?
But when viewed as a negotiating tactic, the logic starts to become clear. The Trump administration has explicitly stated that it wants a weaker dollar – not a ’weak dollar’, mind you – but a currency level that would make U.S. exports more attractive. And Beijing can help deliver this, especially given that China’s currency acts as an anchor for other regional exchange rates.
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Thus, the yuan’s appreciation against the dollar indicates that – despite China’s show of force this week – Beijing is still willing to negotiate with Washington.
’ANTI-INVOLUTION’
China may also want a firmer exchange rate to help ease some domestic concerns, namely sluggish consumption.
The economic data coming out of China will do little to support consumer sentiment or domestic demand: the latest headline manufacturing PMI data was soft, new orders are declining, and construction has contracted at its fastest rate since the pandemic.
President Xi Jinping is clearly taking this seriously. He has pledged to take steps to boost domestic consumption and technological innovation, while supporting small firms. And he has also spoken about breaking the cycle of "involution", a term now widely used for excess competition and overcapacity.
An appreciating yuan should help these efforts because, as all else being equal, a stronger currency should boost domestic demand.
The yuan’s recent rise against the dollar is thus "a policy push, not a market pull," as Goldman Sachs analysts neatly put it.
And given the foreign and domestic concerns China currently faces, investors should not be surprised if Beijing keeps pushing the currency higher, at least until the latest U.S.-Sino tariff truce expires in November. A stronger yuan may be one olive branch Beijing is still willing to offer.
What could move markets tomorrow? * Australia trade (July) * Malaysia interest rate decision * Euro zone retail sales (July) * Canada trade (July) * U.S. trade (July) * U.S. services ISM (August) * U.S. ADP private sector employment (August) * U.S. weekly jobless claims * U.S. Senate Banking Committee hearing on Stephen Mirannomination to Fed Board of Governors * Federal Reserve officials scheduled to speak include NewYork Fed President John Williams, Chicago Fed President AustanGoolsbee
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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6 months ago
Trading Day: Fed hopes lift stocks, clip dollar
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Wall Street rose on Thursday as investors looked favorably on tech despite a mixed reaction to Nvidia’s results, while the prospect of U.S. rate cut next month from a more dovish Fed pushed the dollar lower against nearly every major and emerging currency in the world.
More on that below. In my column today, I look at the rotation out of tech stocks and into small caps that accelerated in August, and ask whether it can continue into September.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Fed Governor Cook sues Trump over his attempt to fireher 2. Dollar drop on politicized Fed may be part of Trumpdeal: Mike Dolan 3. Nvidia CEO says AI boom far from over after tepid salesforecast 4. For bruised bond markets, turbulence persists as debtsales ramp up again 5. EU to scrap tariffs on U.S. goods to pave way for lowercar duties
Today’s Key Market Moves * STOCKS: S&P 500 hits new high, Nasdaq outperforms.Europe, Asia, emerging markets more mixed. * SHARES/SECTORS: Nvidia slips 0.8%, but recovers fromafter-market lows overnight. Tech and communications lead U.Smarkets higher though, small caps lag. * FX: Dollar falls against nearly every currency in theworld, dollar index -0.4%. China’s offshore yuan hits 2025 high. * BONDS: Long-dated yields in Japan, France, and UK easeback from this week’s multi-year peaks. U.S. curve bullflattens, $44 billion auction of 7-year notes goes pretty well. * COMMODITIES: Copper has biggest rise in two weeks, up1.5% to a 2-week high. Nvidia, U.S. GDP help lift prices.
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Today’s Talking Points:
* U.S. GDP resilience
Second-quarter U.S. GDP growth was unexpectedly revised up to an annualized 3.3% from 3.1% and PCE inflation in the quarter was revised slightly lower to 2.5% from 2.6%. On the margins, this may point to more of a ’Goldilocks’ scenario and temper some of the ’stagflation’ fears that continue to swirl.
Does this alter Fed expectations? Probably not - there are some key data before the September 17 decision, starting with July PCE inflation on Thursday, that will have much bigger sway. But it does show that the impact from tariffs on activity and prices hasn’t been properly felt yet.
* Big government
Contrary to what we were told on the campaign trail and led to believe with Elon Musk’s ’DOGE’ moment in the Washington sun, the Trump administration is taking a very active role in many aspects of U.S. economic, policymaking and industrial life.
From taking stakes in big companies like Intel and others to letting Nvidia sell its H20 chips to China in exchange for 15% of those sales, and from trying to stuff the Fed board with loyalists to targeting law firms and academic institutions, the administration’s footprint seems to be expanding, not shrinking.
* Yuan steps beyond
The Chinese yuan - onshore spot and offshore - leapt to its highest level against the U.S. dollar this year, precisely since November 6, the day after the U.S. election. The PBOC’s USD/CNY fixing is on course for its biggest weekly move since September.
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Beijing is clearly steering the yuan higher, not lower, as many observers predicted would be its response to the economy’s deflationary pressures and looming trade war with the U.S. Maybe Beijing is focusing more on bolstering domestic demand than exports?
U.S. small caps quietly notch historic outperformance vs tech
Amid the Federal Reserve drama and deluge of corporate earnings in August, one clear but overlooked trend emerged in U.S. equities: the rotation out of expensive tech stocks and into cheaper small caps. As the month draws to a close, the big question is whether this can continue.
The Nasdaq 100 is currently on track for a monthly gain of 1.5% while the Russell 2000 small cap index is headed for a 7.3% rise, signaling an underperformance of 580 basis points for the tech-heavy index.
According to Stuart Kaiser, head of equity trading strategy at Citi, that relative monthly performance for the Nasdaq 100 is in the bottom 5% since 1985.
And if we look at ETFs, tech’s underperformance looks even more striking. This month, the Invesco QQQ exchange-traded fund tracking the Nasdaq 100 is flat, while the iShares Russell 2000 ETF is up 7%.
FED BOOST
So what’s responsible for this dramatic divergence?
It may partly just reflect investors seeking to rebalance their concentrated and lopsided portfolios. But the split was clearly turbo-charged by Federal Reserve Chair Jerome Powell’s Jackson Hole speech on August 22, when he opened the door to an interest rate cut next month.
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Manish Kabra, head of U.S. equity strategy at Societe Generale, says the Russell 2000 index’s outperformance against the broader S&P 500 that day was the biggest since the U.S. election on November 6 last year that returned Donald Trump to the White House.
Powell’s dovish pivot is helping small caps outperform because these companies tend to benefit more from lower interest rates given that they rely on borrowing to grow and expand. Larger firms, especially ’Big Tech’ megacaps, often have huge cash reserves and easier access to other sources of financing.
To be sure, lower rates wouldn’t just be good news for small caps. The rising tide of liquidity and investor sentiment would typically be expected to lift all boats, including the ’Magnificent Seven’ megaships.
As analysts at UBS point out, past equity bubbles have often been burst by rising interest rates, so a resumption of the central bank’s easing cycle would appear to minimize that particular risk for high-priced tech stocks.
But, regardless, small caps may still continue to get more of a Fed boost in the near term.
AI DOUBTS
Another catalyst for the rotation has been creeping doubts about AI’s ability to deliver returns commensurate with the bubble-like frenzy surrounding the new technology.
Tech stocks remain on the pricey side. That’s justified, argue UBS analysts, by the potential revenue from AI-generated efficiencies, which they estimate could reach around $1.5 trillion a year globally.
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Others are less optimistic. If value creation on this massive scale fails to materialize, then tech companies will struggle to generate a return on the trillions of dollars of global capex expected in the coming years.
That’s why all eyes were on $4.4 trillion Nvidia’s earnings on Wednesday. How investors interpret the global AI leader’s results will help determine whether tech’s underperformance continues into September. The company’s revenue, profit and forecasts looked solid, but uncertainty surrounding the suspension of its business with China and skepticism around the revenue outlook are giving investors pause.
UNDER THE RADAR
For now, market momentum remains with smaller firms. Francis Gannon, co-CIO and managing director at Royce Investment Partners, calls it a "stealth summer" for small caps, the recent outperformance of which has gone "mostly unnoticed" amid the daily headlines centered on economic uncertainty, geopolitical worries, and new highs in the larger cap-led indices.
Indeed, the Russell 2000 has yet to revisit last November’s peak, while the Nasdaq and S&P 500 have been printing new highs for weeks.
Whether or not small caps start hitting new records will likely be determined by what happens at the Fed.
So the big macroeconomic events to watch next month will be the August employment report due on September 5, August CPI inflation data on September 11, and then, of course, the Fed’s policy decision on September 17.
Small caps have enjoyed a pleasant end to the summer. Let’s see what happens when investors all get back to their desks next month.
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What could move markets tomorrow? * China corporate earnings, including Alibaba, BYD, CITIC,China Construction Bank, ICBC, Bank of China * Japan retail sales, unemployment, industrial production(July) * Japan Tokyo inflation (August) * India GDP (Q2) * Germany retail sales (July) * Germany inflation (August, prelim) * ECB board member Luis de Guindos speaks * Canada GDP (Q2) * U.S. PCE inflation (July) * U.S. Chicago PMI (August)
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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6 months ago
Trading Day: Nvidia beats but shares retreat
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
The S&P 500 hit a record high on Wednesday, as Wall Street rose broadly on expectations the Federal Reserve will lower interest rates next month and on investor confidence that tech giant Nvidia’s results would deliver another resounding ’beat’.
More on that below. In my column today, I look at examples of where the overt politicization of monetary policy has had severe economic and market consequences. And contrary to perceived wisdom, these have not just been in emerging markets.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Fed’s credibility is an asset whose decline could becostly 2. The fight for the Fed reaches its decisive moment 3. India hit by U.S. doubling of tariffs, plans to cushionblow 4. Tariff-bolstered U.S. credit rating is still tarnished:Mike Dolan 5. Investors worry Trump’s Intel deal kicks off era of U.S.industrial policy
Today’s Key Market Moves * STOCKS: S&P 500 hits new high. China’s benchmark indexesslump 1.5% or more. Europe flat, Britain’s FTSE 100 falls for asecond day from Monday’s record high. * SHARES/SECTORS: Nvidia shares fall as much as 5% inextended trade after earnings, despite beating on Q2 revenue andforecasting strong Q3 revenue on robust AI chip demand. * FX: Dollar index gives back gains, ends flat. In G10space, dollar falls most vs Canadian dollar and Norwegian krone. * BONDS: French 30-year yield highest since 2011. U.S.2-year yield falls to 3.62%, lowest since May. 5-year auctiongoes reasonably well. * COMMODITIES: Oil rebounds 1% plus from Tuesday’sselloff. Brent crude futures have now swung 1% or more in nineof the last 10 trading sessions.
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Today’s Talking Points:
* Wings of a dove
Investors remain confident that the Fed will cut interest rates next month as the controversy around President Donald Trump’s attempts to fire Fed Governor Lisa Cook persists. Traders are putting a near-90% probability on a move next month, and the 2-year Treasury yield fell to its lowest since May.
New York Fed President John Williams said rates are probably headed lower, but officials need to see more economic data before deciding if a cut next month is appropriate.
* Stock rotation
The S&P 500 clocked a new high on Wednesday, led by the energy and healthcare sectors. As August draws to a close, the rotation into small cap and value stocks from tech and growth stocks shows no sign of reversing.
The Russell 2000 index has lagged all year but on Wednesday notched a new 2025 high, again outperforming Wall Street’s big three indices. Will this continue next month? Much will depend on the impact of Nvidia’s Q2 results, and expectations of what the Fed will do on September 17.
* China takes stock
Chinese stocks have been on a tear, roaring to decade highs earlier this week. But the AI-driven rally sputtered on Wednesday, and the Shanghai Composite slid nearly 2% for its biggest fall since the tariff turmoil of early April.
It may just be natural profit-taking as month-end looms. But maybe the rally is stretched - Hong Kong’s tech index is up 10% in August and up 60% from the April low, and China’s economy is still not out of its funk: China’s economic surprises index last week fell to its lowest level this year.
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Danger ahead! Five examples of risky central bank politicization
There is legitimate debate about the actual independence of modern-day central banks, but almost everyone agrees that overt politicization of monetary policy – as we appear to be seeing in the United States – is dangerous. Why is that?
Central banks are essentially arms of government, and many worked in close conjunction with national Treasuries in response to the Global Financial Crisis and pandemic, so absolute independence is a bit of a myth.
But what U.S. President Donald Trump is currently doing goes well beyond that. By threatening to fire Chair Jerome Powell, actively trying to sack Governor Lisa Cook, and attempting to fill the Board of Governors with appointees sympathetic to his calls for lower interest rates, he is shattering the Fed’s veneer of operational independence.
Examples of the naked politicization of monetary policy down the years show that it can, to put it mildly, deliver sub-optimal results - loss of credibility, currency weakness, spiking inflation, rising debt, elevated risk premia, and, potentially, much higher borrowing costs.
These are certainly far from guaranteed outcomes in the U.S., but they show where excessive political interference in monetary policy can lead.
TURKEY
"Erdoganomics", the unorthodox economic theories and policies of Recep Tayyip Erdogan, who has been President of Turkey since 2014, are a prime example of politicized monetary policy. Erdogan, an avowed "enemy" of interest rates, is on record as saying high interest rates cause inflation and that the way to reduce inflation is therefore to lower borrowing costs.
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He fired or replaced five central bank governors between 2019 and 2024, some for hiking interest rates or refusing to cut them.
With inflation and interest rates hovering around 20% in late 2021, the central bank succumbed to Erdogan’s pressure and slashed borrowing costs. The result? The currency collapsed and inflation soared above 85%.
ARGENTINA
Few central banks in the modern era have so clearly been de facto arms of government as Argentina’s Banco Central de la Republica Argentina. Successive governments have leaned heavily on the BCRA to print money to fund their spending, with predictable results. The country has been in and out of economic crises, and battling high or even hyper-inflation for decades.
The tenure of a BCRA president tends to be short: there have been 13 BCRA heads this century. And there were seven in the first seven years of Carlos Menem’s Presidency between 1989 and 1996. President Cristina Fernandez de Kirchner also notoriously fired BCRA chief Martin Redrado in 2010 because he opposed her plan to use $6.6 billion in FX reserves to pay down debt.
INDIA
Pressure on the Reserve Bank of India has intensified under the government of Prime Minister Narendra Modi. In December 2018 RBI Governor Urjit Patel resigned abruptly after just over two years in the job following months of government pressure to ease lending conditions and allow the government more access to reserves to boost spending ahead of national elections.
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In the months before Patel’s departure, Modi also removed RBI board members and appointed his supporters in their place, unnerving investors. This helped push the rupee to a then-record low against the dollar that October, and annual inflation more than trebled over the following year to nearly 8%.
JAPAN
The situation here is a bit different – given that Japanese leaders have often been actively seeking a weaker currency and higher inflation – but the cozy relationship between the government and the Bank of Japan has still arguably had a negative impact on the country’s long-term economic health.
The Japanese government and central bank have worked almost as one while completing several FX interventions over the years. The ties deepened with the roll out of "Abenomics" in 2012, the economic reforms introduced by Prime Minister Shinzo Abe, that included the ’three arrows’ of fiscal policy, monetary policy, and structural reform.
At the heart of Abenomics was unprecedentedly loose monetary policy, even by BOJ standards. The central bank expanded its balance sheet massively - it’s still around six times larger than the Fed’s as a share of GDP - and deployed negative interest rates for years.
Did it work? Many critics argue not, as growth remained sluggish, inequality rose, and Japan is now hamstrung by the world’s largest public debt load.
UNITED STATES
Last is, perhaps surprisingly, the U.S. itself. In the early 1970s, President Richard Nixon pressured then-Fed Chair Arthur Burns to keep monetary policy loose ahead of the 1972 election even though inflationary pressures were building.
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Nixon also reportedly told Burns in 1969, just after he nominated him, that previous Fed chair Bill Martin was always six months "too late" doing anything. "I’m counting on you, Arthur, to keep us out of a recession," adding: "I know there’s the myth of the autonomous Fed..."
Burns served as Fed chair for eight years through 1978, during which time inflation exploded and didn’t fully come down until the early 1980s. Many observers consider him to be one of the least successful chairs in the Fed’s history.
It barely needs saying that the U.S. is unlike any other country. Its economy and capital markets dwarf all others, the dollar is the world’s reserve currency, and its rates and bond markets are the benchmarks for global borrowing costs.
That means that the magnitude of any market or economic impact from Trump’s political interference could very well be smaller than the ructions of the past. But America’s global heft also means that the worldwide impact of these moves could be much greater.
What could move markets tomorrow? * South Korea interest rate decision * Philippines interest rate decision * Bank of Japan board member Junko Nakagawa speaks * China earnings, including ICBC half-yearly results * Euro zone sentiment indicators (August) * Canada current account (Q2) * U.S. GDP (Q2, second estimate) * U.S. weekly jobless claims * U.S. Treasury auctions $44 bln of 7-year notes * Reaction to Nvidia Q2 results released late Wednesday * U.S. earnings including Dollar General, Best Buy, HP
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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6 months ago
Trading Day: Rate outlook Trumps deepening Fed turmoil
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
U.S. stocks rose on Tuesday as investors looked at President Donald Trump’s controversial efforts to fire Fed Governor Lisa Cook through the prism of possible interest rate cuts soon and parked to one side the longer-term erosion of confidence in the central bank and U.S. policymaking more broadly.
More on that below. In my column today, I ask whether Nvidia’s earnings on Wednesday will be strong enough to dispel concerns among some investors around when AI will deliver its promised returns, and keep the tech rally going.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump takes his Fed fight to unprecedented level witheffort to fire Cook 2. What’s known about the legal premise for Trump’s effortto fire Fed’s Cook 3. Mantra of central bank independence shaken by Trumpmoves on Fed 4. Trump’s latest Fed jab breeds more dismay than drama 5. Dollar turn emboldens dogged wariness of Wall Street:Mike Dolan
Today’s Key Market Moves * STOCKS: European shares fall sharply, China’s indicesease back from 10-year highs, Wall Street edges higher. * SHARES/SECTORS: Rotation into small caps continues,Russell 2000 outperforms. Nvidia shares +1% ahead of results,Keurig Dr Pepper slumps another 7% after buying JDE Peets. * FX: Dollar slips across the board but closes off itslows of the day. ’Safe-haven’ yen and Swiss franc outperform. * BONDS: U.S. yield curve steepens as much as 7 bps,2-year auction draws highest bid-to-cover ratio this year. * COMMODITIES: Oil slides more than 2%, its biggest fallin three weeks.
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Today’s Talking Points:
* Fed independence
Trump’s attempt to fire Fed Governor Lisa Cook for alleged mortgage irregularities has cranked up his feud with the central bank to unprecedented levels. Cook insists she will not resign, her lawyer says she will sue Trump for trying to fire her, and the Fed says she will seek a court ruling to continue in her role.
Traders are betting on a rate cut next month, and Treasury yield curves are steepening. This may offer some near-term support for equities. But beyond that, doubts over the credibility of Fed policy are bound to intensify, and that will surely come back to bite markets.
* Long yields
It’s not just ultra-long U.S. Treasuries that are under heavy selling pressure. Longer-dated yields in Japan, Britain, and the euro zone are also rising as long-term debt sustainability across the industrialized world comes under the microscope.
Britain’s 30-year gilt yield surged on Tuesday to close near its highest level in 27 years, Japan’s 10-year yield rose to a 17-year high, and the 30-year yield hugged Monday’s record high of 3.2150%.
* French politics
France’s minority government is teetering, with the three main opposition parties saying they will not back a confidence vote which Prime Minister Francois Bayrou announced for September 8 over his plans for sweeping budget cuts.
The ripples are being felt across the euro zone, where equity and bond prices fell on Tuesday. Italy has long been viewed as the weak fiscal link among the big euro zone countries, but right now the spotlight is firmly on France.
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Can Nvidia results dispel creeping AI doubts?
Questions are arising about when artificial intelligence will deliver its promised returns, meaning tech-concentrated U.S. equity indices sitting near record highs are vulnerable to a correction.
Nvidia’s quarterly results this week could therefore potentially be explosive – not just for the company’s shares or the tech sector, but for all of Wall Street.
The U.S. chipmaker and global AI leader is the world’s most valuable company, with a market cap of $4.4 trillion. That’s double the entire value of Germany’s benchmark DAX and represents 8% of the S&P 500, the largest share for any single stock in the index’s history.
Nvidia is expected to report a 53% increase in revenue to $46.02 billion on Wednesday, according to the mean estimate from 40 analysts, based on LSEG data. That would be higher than the company’s own guidance three months ago.
Given Nvidia’s unprecedented weight in the U.S. market, its earnings releases have become an event – almost akin to U.S. GDP or inflation statistics. But Wednesday’s numbers will be scrutinized particularly closely given the questions being raised about whether we’re seeing an AI bubble.
’OVEREXCITED’
Doubt appears to be creeping in among investors about when and by how much - or even if - the eye-watering investment in AI projects and infrastructure will begin to pay off. And it’s not just the bearish, contrarian, ’Magnificent Seven’ short sellers peddling this narrative either.
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"Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes," said none other than ChatGPT founder Sam Altman earlier this month, according to The Verge.
A recent Massachusetts Institute of Technology study found that 95% of companies are getting zero return on the billions of dollars they have plowed into Generative AI investments. More than 80% of companies have looked into or started using tools like ChatGPT and Copilot, but they only boost individual productivity, not firms’ bottom line, the study found.
Investors appear to be growing antsy, with some beginning to rotate out of expensive tech and growth stocks and into small caps and value names. In the last two weeks, the Invesco QQQ exchange-traded fund tracking the tech-heavy Nasdaq 100 is down nearly 1%, while the iShares Russell 2000 ETF is up over 5%.
That could just be a bit of mean reversion in thin August trading, but it’s a nervy backdrop for Nvidia’s earnings release.
TRILLION DOLLAR BET
One of the key worries being bandied about is the amount of money companies are investing in AI. The ’Magnificent Seven’ U.S. tech giants have pledged hundreds of billions of dollars in the coming years on AI-related investment.
Morgan Stanley analysts predict nearly $3 trillion of global spending on data centers through 2028, with over $900 billion anticipated in 2028 alone. To put that into perspective, capex spending among all S&P 500-listed companies last year was around $950 billion.
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Analysts at McKinsey go even further. They estimate that investment in data centers worldwide will need to reach $6.7 trillion by 2030 - covering hardware, processors, memory, storage, and energy - to keep up with demand.
With sums like that, the hurdles to making an attractive return on investment are huge. But so are the potential rewards if they do. Morgan Stanley strategists estimate that the long-term ’economic value creation’ for S&P 500 companies from AI could reach $920 billion a year.
In theory, this could increase the S&P 500 market’s value by $13 trillion, using a 10-year average multiple of 18.5 times future earnings, or up to $16 trillion, based on the current market multiple of around 22.
HIGH EXPECTATIONS
But that’s way down the line. It takes years for new technologies to be fully adopted, and although markets are forward-looking, investors can grow impatient if promised returns fail to materialize. Especially when share prices have run up in the meantime.
We may already be starting to see that in the recent tech pullback. In the four months up to the mid-August high, U.S. tech shares gained 53%, the strongest performance over a comparable period since March 2000, Truist Investment Advisory’s co-CIO Keith Lerner recently noted.
"The rubber band for tech stretched too far - at least in the short term. Tech became overcrowded and vulnerable to negative headlines," Lerner says.
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Given Nvidia’s prominence, a release of bumper figures could calm AI jitters, but its failure to meet analysts’ lofty expectations could cause the tech snap-back to become a whole lot sharper.
What could move markets tomorrow? * Australia inflation (July) * Germany GfK consumer sentiment (September) * U.S. Treasury auctions $70 billion of 5-year notes * Nvidia Q2 results (after market close) * Richmond Fed President Thomas Barkin speaks
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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6 months ago
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6 months ago
Trading Day: Tech it down a notch
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Wall Street slumped on Tuesday, dragged down by weakness in some of the big tech companies that have led the charge to new highs this year, as investors hunker down ahead of a keynote speech by Fed Chair Jerome Powell later this week.
More on that below. In my column today I look at the cagey dance between Donald Trump and Wall Street - the market knows it has the power to rein in some of the president’s policy excesses, but isn’t wielding it. Not yet, anyway.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump says Putin may not want to make a deal on Ukraine 2. Switzerland ready to host Putin for any Geneva peacetalks, minister says 3. S&P affirms ’AA+’ credit rating for US, cites impact oftariff 4. Trump’s interest rate demands put ’fiscal dominance’ inmarket spotlight 5. AI will replace most humans, but then what?
Today’s Key Market Moves * STOCKS: Wall Street in the red, with the Nasdaq leadingthe way, down 1.5%. The Dow ekes out a new high of 45,207 pointsbefore easing. Europe gains, Asia and EM in the red. * SHARES/SECTORS: Intel (NASDAQ:INTC) up 7% after Softbank (OTC:SFTBY) takes $2 blnstake. Nvidia (NASDAQ:NVDA) -3.5%, its biggest fall in four months, pushingthe tech sector down nearly 2%. * FX: Canadian dollar falls 0.5% to 1.3855/$ on softinflation data. Brazil’s real down 1.2% to 5.50/$, another downday and its biggest fall in six weeks. * BONDS: Treasury yields ease from recent highs, down 4bps at the long end to flatten the curve. UK 30-year yield hitsnew 27-year high, but ends the day lower too. * COMMODITIES: Oil falls again, WTI crude futures down1.7% to lowest close since June 2 at $62.35/bbl.
Today’s Talking Points:
* Peace in our time? Investors digested the extraordinary summit between U.S. President Donald Trump, Ukraine President Volodymyr Zelenskiy, and a phalanx of European leaders in the White House on Monday. Did it move the dial much on the prospects of a Russia-Ukraine ceasefire, or a deal to end the war?
Optimism around Trump’s promise of security guarantees for Ukraine in the future buoyed European markets on Tuesday. But that evaporated as the U.S. session rolled on, as Trump told Fox News he thinks Russian President Vladimir Putin may not want to make a deal after all.
There may be no immediate direct impact on major equity, bond, or currency markets from the conflict. But prolonged war on Europe’s doorstep, fractured ties between the US and Europe, and a fickle relationship between Trump and Putin can’t be good in the long term.
* Retail therapy. Some of America’s biggest retailers report second-quarter earnings this week, shining a light on the health of the U.S. consumer and, by extension, the economy at large. Home Depot (NYSE:HD) reported on Tuesday; Lowe’s (NYSE:LOW), Target, and TJX release results on Wednesday; and Walmart (NYSE:WMT) is out on Thursday.
There are conflicting signals coming from the U.S. consumer. By some measures, household consumption flat-lined in the first half of the year, but other indicators show consumer spending is the biggest contributor to GDP growth. The rich are spending, but the bottom 50% are struggling.
The S&P 500’s consumer discretionary sector is flat this year, and the consumer staples index is up 6%. Both are lagging the broader index, which is up 8%, and the IT and communications sectors, which are both up around 13%.
* Interest rate decisions. The central banks of New Zealand, Indonesia, and China announce their latest policy decisions on Wednesday. Two of the three are expected to stand pat, and one is expected to cut borrowing costs.
The People’s Bank of China is expected to keep benchmark one- and five-year lending rates unchanged for the third straight month at 3.5% and 5.5%, respectively. Although the economy needs more support, the central bank may want to explore structural policies aimed at specific sectors rather than broad-based monetary easing. For now.
This has helped propel a recovery in the yuan, which was plumbing 17-year lows at the depths of the "Liberation Day" tariff turmoil in April. Since then, the PBOC has only lowered borrowing costs once, by 10 basis points, and has fixed the yuan higher in 16 of the last 19 weeks.
Markets, Trump in delicate policy dance
U.S. President Donald Trump has faced little opposition in his drive to rip up the global economic rulebook, whether from his fellow Republicans, political opponents, or institutional guardrails. The only exception has been "the market."
But now even investors are holding their fire, enabling more risk to build up in the financial system.
Wall Street’s reaction to Trump’s "Liberation Day" tariffs on April 2 was so ferocious that the president did something he had rarely done: he backed down.
Trillions of dollars were wiped off the value of U.S. stocks amid a 10% nosedive from April 3-4. The only two-day selloffs since the 1930s that were bigger occurred during the Second World War, "Black Monday" in 1987, the Global Financial Crisis in 2008, and the pandemic in 2020.
The stock market bottomed out on April 7 after Trump paused most of his country-specific tariffs. Wall Street has not looked back since, with the S&P 500 rebounding 35% to an all-time high.
This episode suggests that "the market" is one of the few true checks on Trump’s apparent pursuit to reshape the U.S. – and indeed the world – economy.
The only problem is that the president has continued to pursue unorthodox policies in recent months - including challenging the independence of the Federal Reserve, firing statisticians, and slapping tariffs on countries for non-economic reasons – and investors have failed to tap the brakes.
FED PUT
The so-called "Trump put" -- the idea that the president won’t let the markets fall too far -- is essentially a funhouse mirror version of the famous "Fed put," the long-held belief that, in the event of a crisis, the central bank will step in to restore stability.
Trump seemingly did just that in April, but it was to clean up a mess of his own making. And one could argue that it was actually investors who came to the economy’s rescue by putting pressure on the president to reconsider policies considered ill-advised by most economists.
Trump and markets are therefore now in a curious dance.
Investors appear to believe that markets can ultimately stop Trump from pushing the envelope too far on tariffs or other policies. But as a result, investors are not overreacting – or reacting at all – to the latest controversies around the Bureau of Labor Statistics firing, his attacks on Fed Chair Jerome Powell, his pressure on Intel’s CEO to resign, or the outsized tariffs slapped on Brazil and India.
This, in turn, has powered the markets to new record highs, emboldening Trump to push the envelope even further.
RISK ON
So even though the market has the power to rein in the president’s economic policy excesses, it’s not using it. Why hasn’t the market pushed back?
As the cliche goes, equity investors are paid to be optimistic. It’s in their interest to keep the train hurtling along, provided there aren’t any immediate obstacles to derail it.
There are, of course, a few pretty large hurdles on the horizon for the U.S. economy, including the highest tariffs since the 1930s and some of the biggest budget deficits since World War II outside of crisis periods. But until these or other issues present an immediate economic threat, markets can choose to ignore them.
By under-reacting to Trump’s unorthodox policies, markets may not only delay the day of reckoning but also amplify the potential impact.
Why? Genuine economic and geopolitical paradigm shifts are under way, and investors are not pricing in the attendant risk. Nobody knows what the ultimate impact of these shifts will be, but we do know that with greater uncertainty comes greater downside risk.
Yet equity volatility is the lowest it has been this year, and even in the bond market – not known for its optimism – volatility is the lowest in three and a half years, while U.S. corporate bond spreads are the tightest since 1998.
Ultimately, the market is unlikely to call Trump’s bluff until something truly unexpected or extreme hits. In the meantime, investors can justify this nonchalance by saying that corporate earnings growth is solid, AI enthusiasm is high, economic growth remains decent, unemployment is low, and consumers are still spending.
Wall Street is choosing not to put on the brakes, meaning this train will continue rolling on. Whether it’s heading for a collision is an open question.
What could move markets tomorrow? * New Zealand interest rate decision * Indonesia interest rate decision * China interest rate decision * Japan machinery orders (June) * Japan trade (July) * UK inflation (July) * Germany producer price inflation (July) * Euro zone inflation (July, final) * U.S. Treasury auctions $16 billion of 20-year bonds * U.S. earnings, including retailers TJX Companies (NYSE:TJX), Lowe’s,and Target
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Rod Nickel)
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6 months ago
Trading Day: Muted Monday, eyes on Trump summitry
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Many world markets took a breather on Monday as investors awaited the outcome of U.S. President Donald Trump’s extraordinary meetings with Ukraine’s Volodymyr Zelenskiy and many European leaders, and looked ahead to Fed Chair Jerome Powell’s keynote speech in Jackson Hole later in the week.
More on that below. In my column today I ask whether U.S. consumer spending can be sustained, which would keep the economy growing and steer it away from recession. Much will depend on how the rich feel about their finances.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Powell has used Jackson Hole to battle inflation andbuoy jobs; he’s now caught between both 2. What US stagflation risks mean for world markets 3. Eerily calm credit markets face pockets of concern: MikeDolan 4. Japan says US is not pressuring BOJ for rate hikes,markets not so sure 5. China’s half-cooked growth plan is going cold
Today’s Key Market Moves * STOCKS: Australian stocks hit new highs and Chinesestockshit 10-year peaks, but otherwise it’s quiet. Wall Street’sbig three indices close essentially flat. * SHARES/SECTORS: HR management software firm Dayforcejumps 26% on news it is the subject of a private equity bid.Intel (NASDAQ:INTC) down 3.7% on a report the Trump administration is in talksto take a 10% stake in it. * FX: Very quiet in G10 FX, with the yen the biggestdecliner. Beijing fixes the yuan at 7.1322/$, its strongestsince Nov. 6. Brazil’s real is among the worst-performingcurrencies in the world, down 0.6%. * BONDS: 30-year yields rise around the world - US 2-weekhigh, Japan 3-week high, Germany 14-year high. Meanwhile, allseems calm in U.S. credit - corporate bond spreads tightestsince 1988. * COMMODITIES: Oil prices rise around 1%. Brent crudefutures settle at $66.60/bbl, WTI crude at $63.42/bbl.
Today’s Talking Points:
* Europe goes to Washington. U.S. President Donald Trump’s intense, hastily-arranged summitry continued on Monday as he welcomed Ukraine’s President Volodymyr Zelenskiy to the White House to discuss how to end the Ukraine-Russia war. This follows Trump’s meeting with Vladimir Putin in Alaska on Friday, which was a success for the Russian president but yielded little for Trump.
And that meant little for Ukraine or Europe, which explains the extraordinary sight of Zelenskiy being backed in Washington on Monday by many of Europe’s most powerful leaders, including Germany’s Friedrich Merz, France’s Emanuel Macron, Britain’s Keir Starmer and NATO’s Mark Rutte.
Trump’s appearance with Zelenskiy before the cameras was cordial and even friendly, in stark contrast to their acrimonious meeting in February. Trump said the U.S. would help Europe in providing security for Ukraine as part of any deal, but also suggested to reporters that he no longer believed a ceasefire was a necessary prerequisite for striking a peace agreement.
* Jackson Hole. Attention is now turning to the annual Kansas City Fed’s symposium in Jackson Hole, Wyoming, which gathers Fed officials, central bankers and leading economists from around the world to discuss the challenges facing the global economy. Fed Chair Jerome Powell’s speech on Friday is the keynote event.
Leaving aside any possible long-term policy steers, such as changes to QT or tolerating slightly higher inflation, the main focus is whether he leans toward a rate cut in September or not.
Rates traders still think he will, but their conviction is ebbing by the day. They are now attaching an 82% probability of a quarter-point cut next month, the lowest likelihood since the unexpectedly weak employment data on August 1.
* Long-end bond blues. Yields on 30-year sovereign bonds in major countries around the world continue to rise. In some cases, like that of Germany, they are now the highest in many years as investors begin to fret again about inflation and fiscal spending plans.
Many investors are also questioning the wisdom of the Fed resuming its easing cycle next month, which is what’s currently priced into rates futures markets, with inflation above target, unemployment at a historical low, stocks at record highs and financial conditions the loosest in years.
Even the long end of China’s bond market is feeling the squeeze. The 30-year yield spiked 8 basis points to 2.12% on Monday, the highest in five months and biggest one-day rise since October. And this is in China, where the deflationary pressures of the last few years are showing no sign of lifting.
Can the rich continue to prop up US consumer spending?
U.S. consumer spending’s surprising resilience is the main reason the economy has not only avoided recession, but continued to grow at a solid clip. The big question now is whether American households can keep that going, especially with higher, tariff-fueled prices coming down the pike.
In the U.S., "the consumer" is king. Consumer spending accounts for around 70% of total economic output, so changes in people’s propensity to spend have a direct, outsized influence on the health of the economy.
But "the consumer" is, of course, actually millions of people. And when you split them into groups based on income and wealth, it becomes clear that total spending disproportionately comes from the rich.
Mark Zandi, chief economist at Moody’s Analytics, said earlier this year that the richest 10% of Americans, those earning at least $250,000 a year, now account for half of all consumer spending. That’s a record. Thirty years ago, the richest 10% accounted for 36% of all consumer spending.
A Boston Fed paper last week backed up Zandi’s findings, concluding that the strength of aggregate consumer spending in the last three years is due to high-income earners. But the authors suggest high-income consumers have a reasonable cushion because they haven’t maxed out their credit cards.
While the lower-income and middle-income cohorts both saw their credit card debt soar past pre-pandemic totals in the last few years, wealthier Americans’ credit card debt remains below the 2019 high and well below the level implied by the pre-pandemic trend. So, if necessary, they still have room to borrow to fund their spending.
EARNING POWER
Spending across the income deciles could also be supported by enhanced earning power.
While some indicators show that the U.S. labor market may be softening, annual average earnings growth still rose in July to 3.9%, meaning real wage growth is running at a 1.3% annual pace, depending on what slice of inflation you use. Real annual wage growth has been between 1.0% and 1.8% for over two years, above the average for the decade leading into the COVID-19 health crisis.
And overall workers’ income may be growing at an even faster rate, according to economists at Bank of America. They calculate that aggregate labor income – number of jobs multiplied by wages multiplied by number of hours worked - increased 5.5% in July on a six-month annualized basis. Most of that growth was driven by higher wages.
With household delinquency rates, excluding student loans, cooling off this year, strength in labor income should continue to support consumer spending, they argue. This, in turn, should help the U.S. avoid the recessionary spiral of lower spending begetting layoffs, begetting even lower spending, begetting more job cuts.
This is one of the reasons BofA economists retain their out-of-consensus call that the Federal Reserve won’t cut interest rates at all this year.
FLASHING AMBER?
Others are less confident.
Zandi at Moody’s Analytics warns that a correction on Wall Street would hit the rich hard via the negative wealth effects, "and, given how weak the economy is, push it into recession."
The concentration of equity ownership at the top of the U.S. wealth ladder is extreme - the richest 1% in the country owns 50% of stock market assets and the top 10% holds around 90%.
Some measures of household spending are already flashing amber. Inflation-adjusted spending as measured by personal consumption expenditures flat lined in the first half of this year.
Yet figures on Friday showed that retail sales rose 0.5% in July after an upwardly revised 0.9% gain in June.
But then there are tariffs. Companies, not consumers, have borne the brunt of these levies so far. Economists at Goldman Sachs estimate that consumers absorbed only 22% of tariff costs through June, but they reckon that figure could rise to 67% in the months ahead if the Trump administration’s expected tariffs are implemented.
So there are grounds for both caution and optimism. Much will depend on whether the rich draw in their horns.
What could move markets tomorrow? * Australia consumer sentiment (August) * Euro zone current account (June) * Canada inflation (July) * Federal Reserve Vice Chair for Supervision Michelle Bowmanspeaks * U.S. earnings - Home Depot (NYSE:HD), Palo Alto Networks (NASDAQ:PANW)
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Deepa Babington)
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7 months ago
Trading Day: PPI surprise clips doves’ wings
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
A surprise spike in U.S. producer price inflation took the wind out of stock markets’ sails on Thursday and prompted investors to reassess their view that an interest rate cut next month was a near certainty.
More on that below. In my column today I look at five charts that show the foundations underpinning the U.S. economy and Wall Street may be shakier if you strip out the AI- and tech-related spending.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump’s data war risks creating false calm: Mike Dolan 2. Fed hawks and doves: what U.S. central bankers aresaying 3. Trump’s debanking order could create headaches forbanks, sources say 4. Trump says Putin ready to make deal on Ukraine, U.S.hopes to include Zelenskiy 5. Which Donald Trump will negotiate with Putin in Alaska?
Today’s Key Market Moves * STOCKS: The Russell 2000 falls 1.3% but the S&P 500,Nasdaq and Dow basically end flat. Indeed, the S&P 500 manages anew closing high. * SHARES/SECTORS: Seven sectors in the S&P 500 fall, ledby industrials and materials, off around 0.9%. Fashion retailerTapestry sinks 15% on tariff, profit warning. * FX: Dollar rebounds around 0.5% for its best day in twoweeks. Biggest G10 FX move is New Zealand dollar, down 1%. * BONDS: Treasury yields rise as much as 5 bps. Curvesbarely move, but 2s/30s still close to steepest levels in threeyears around 115 bps. * COMMODITIES: Oil spikes around 2%, its biggest rise intwo weeks.
Today’s Talking Points:
* The Fed outlook. Rates traders trimmed the probability of a quarter-point rate cut next month to 90% from 100% after the release of July’s producer price inflation data. Core annual PPI shot up to 3.7%, the highest in three years. Excluding pandemic distortions, the jump from June’s 2.6% was the biggest since comparable data was first gathered in 2011.
Talk of a 50-basis point cut next month, partly fueled by Treasury Secretary Scott Bessent on Wednesday, has evaporated. The PPI data ensured that, but Bessent also rowed back a bit on Thursday. Another couple of solid inflation and employment reports, and could a September cut be taken off the table completely?
* European GDP. The first estimate of Q2 UK growth was released on Thursday and broadly speaking, the 0.3% expansion was better than expected - or not as bad as feared, depending on your view. Indeed, Britain’s economy grew nearly twice as fast as the U.S. economy in the first half of the year.
Euro zone GDP was less stellar, with a slump in industrial production in June and downward revision to May capping overall GDP growth in the April-June period at just 0.1%. That marked a clear slowdown from 0.6% expansion in the first quarter.
The elephant in the room, of course, is the impact of tariffs, which has yet to be fully felt, suggesting the second half of the year is likely to be bumpier than the first.
* Do you want to make a deal? Donald Trump and Vladimir Putin meet in Alaska on Friday, with the U.S. President saying his Russian counterpart is keen to "make a deal" on Ukraine. The aim of Friday’s talks is to set up a second meeting including Ukraine, and perhaps agree the framework for a ceasefire.
Despite his harsher tone toward Putin over the past months, Trump has a long history of trying to placate the Russian leader. The Trump administration has sought to temper expectations, and White House press secretary Karoline Leavitt told reporters on Tuesday the meeting would be a "listening exercise."
That’s probably not what Ukrainian President Volodymyr Zelenskiy wants to hear.
The U.S. economy’s key weak spots in five charts
The U.S. economy seems to be chugging along fairly smoothly, if a little too slowly for some observers’ liking. Under the bonnet, however, the picture is more worrisome, and the risk of engine malfunction is rising.
Technology’s role in the U.S. economy has never been greater, and artificial intelligence could deliver a historic productivity boom. But return on the huge investment being made on that bet could take years to materialize. What’s more, an unbalanced economy may not be desirable in the long term, as it can lead to poor investment and policy decisions.
Below are five charts that indicate the foundations of the resilient U.S. economy and booming stock market may be much shakier than they appear, especially if AI- and tech-related spending, investment and optimism are stripped out.
INVESTMENT
Inflation-adjusted investment in ’AI-sensitive’ sectors of the economy since the end of 2019 has risen 53%, notes Troy Ludtka, senior U.S. economist at SMBC Nikko Securities. Investment elsewhere has inched up just 0.3%.
CONTRIBUTION TO GDP
Relatedly, the contribution of software and IT equipment capex to U.S. GDP has never been higher, according to analysts at BlackRock. Aggregate capex in all other areas of the economy, however, actually fell in the first half of this year – a rare occurrence.
CONSUMER SPENDING
Meanwhile, personal consumption expenditures are slowing sharply, a worrying sign given that the consumer accounts for around 70% of total U.S. GDP. Personal consumption expenditures in the second quarter grew by only 0.9%, the slowest pace since the pandemic. And in real terms, consumer spending has completely flat-lined in the first half of the year.
CORPORATE BANKRUPTCIES
Corporate bankruptcies in July were the highest for a single month since July 2020, according to S&P Global Market Intelligence. Even more alarming, the tally of year-to-date bankruptcy filings through the end of July was the highest for this seven-month period since 2010. Nearly a third of this year’s bankruptcies were in the consumer discretionary and industrial sectors.
STOCK MARKET CONCENTRATION
Finally, the concentration on Wall Street has been widely discussed, but the levels continue to be eye-popping. One stock, chipmaker Nvidia, accounts for 8% of the benchmark S&P 500’s entire market cap. That’s a record for a single name.
And the top 10 stocks, most of which are Big Tech megacaps, make up 40% of the index’s market cap and 30% of all earnings. These are also record levels.
The more Wall Street – and even global markets - rely on the revenue, earnings and profitability of a set of companies that can be counted on two hands, the bigger the potential mess could be if the trends driving these companies’ performance lose momentum.
What could move markets tomorrow? * China "data dump" including investment, retail sales,industrial production, house prices, unemployment (July) * Japan GDP (Q2) * Taiwan GDP (Q2, revised) * Hong Kong GDP (Q2, final) * U.S. retail sales (July) * U.S. industrial production (July) * U.S. New York Fed manufacturing (July) * U.S. University of Michigan inflation expectations andconsumer sentiment (August, prelim) * U.S. President Donald Trump and Russian President VladimirPutin summit in Anchorage, Alaska.
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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7 months ago
Trading Day: Is the only Fed doubt now a 25 or 50 bps cut?
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Stocks rose around the world on Wednesday, and bond yields and the dollar fell, as comments from U.S. Treasury Secretary Scott Bessent fueled traders’ bets that the Fed will cut interest rates next month, perhaps even by half a percentage point.
More on that below. In my column today I suggest that what’s giving Fed Chair Jerome Powell his biggest headache right now is not the pressure or attacks from U.S. President Donald Trump, but the inconclusive economic data.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Fed cut seen near certain after inflation data, Bessentcomments 2. U.S. embeds trackers in AI chip shipments to catchdiversions to China, sources say 3. Just in time? Manufacturers turn to AI to weather tariffstorm 4. China July bank loans unexpectedly contract for firsttime in 20 years 5. Stablecoins fuel liquidity, not yet money: Mike Dolan
Today’s Key Market Moves * FX: Dollar falls again, lowest in nearly three weeks onindex basis. Biggest G10 FX mover is sterling, up 0.5%. * STOCKS: MSCI All Country, Canada, Japan, S&P 500 andNasdaq hit new highs. Chinese stocks now up 16 of last 20sessions, Wall Street’s VIX volatility index falls to 2025 low. * SHARES/SECTORS: Beaten-down healthcare, and basicmaterials sectors lead Wall Street rally, both up around 1.7%. * BONDS: U.S. yields down across the curve, as much as 6bps at the long end. The ’MOVE’ implied volatility index fallsto lowest since January 2022. * COMMODITIES: Oil falls to lowest in more than twomonths. Brent crude touches $65/bbl, WTI dips below $62/bbl.
Today’s Talking Points:
* Fed policy. In the realms of market pricing, a rate cut next month is now a nailed-on certainty, with traders putting the chances of a quarter point cut at 99.9%.
This wager was strengthened by comments from Bessent, who told Bloomberg News a 50-basis point cut was possible.
Bessent’s comments are the latest in a growing list of verbal interventions - or outright political interference - from the Trump administration in the business and economics arena it traditionally steers clear of, like the Fed, non-partisan institutions, and private sector companies and banks.
* Trump’s Fed nominations. Bessent said early on Wednesday that no fewer than 11 candidates were being considered to replace Powell, whose term expires in May (or, earlier, if he is fired or resigns).
The president later shortened that list to three or four.
Interestingly, absent from Bessent’s list was current Council of Economic Advisers Stephen Miran, nominated to fill an open Fed board seat with a term that ends in January.
* Trump-Putin meeting. The U.S. and Russian leaders are scheduled to meet in Alaska on Friday, a face-to-face which Ukraine’s allies hope will see Trump urge Putin to agree a ceasefire without selling out Kyiv’s interests or carving up its territory.
Trump, Ukraine’s Volodymyr Zelenskiy and European leaders met in a last-ditch videoconference on Wednesday to lay out Ukraine’s red lines, a call Trump said was "very friendly".
France’s Emmanuel Macron said Trump was "very clear" that he wants to achieve a ceasefire in Alaska.
Fed more hamstrung by murky data than Trump interference
It’s widely believed that U.S. President Donald Trump’s insistence on lower interest rates is what’s making life most difficult for Federal Reserve Chair Jerome Powell and his colleagues. But what’s causing the biggest headache for Fed officials is, in fact, probably more prosaic: economic data.
The key challenges facing Powell were encapsulated perfectly on Tuesday by the release of an inconclusive U.S. inflation readout followed by Trump’s latest verbal attack – and threats of a "major lawsuit."
Politics aside, most Fed officials agree that rates will fall this year, with the median "dot plot" in the Fed’s June Summary of Economic Projections pointing to 50 basis points of easing through December. Traders are betting heavily that the first move will be in September.
But it’s tough to justify that confidence based purely on economic data. While some indicators suggest policy should be eased sooner rather than later, others indicate that would be a high-risk move. Looking at the "totality of the data," to borrow a phrase from Powell, there is no clear signal either way.
PLENTY NOISE, FEW SIGNALS
Consider the latest U.S. inflation and employment reports, the two most important data sets. On their own, they don’t appear soft enough to warrant the Fed trimming rates right now, but they also aren’t firm enough to dispel the notion that policy easing is only a question of "when" not "if."
Annual headline CPI inflation held steady in July at 2.7%, contrary to an expected rise, with month-on-month increases in line with forecasts. But annual core inflation rose more than expected to 3.1%, the highest level since February and still meaningfully above the Fed’s 2% target.
Economists calculate that durable goods prices rose 1.7% in the first six months of the year – the biggest six-month rise since 1987, excluding the COVID-19 pandemic. They warn there is likely more of that to come as Trump’s tariffs kick in.
"July’s CPI data are probably more worrying under the surface than in the headlines, and we expect the upward pressure to goods inflation to build in the coming months," James Pomeroy, a global economist at HSBC, wrote on Tuesday.
Meanwhile, last week’s employment report showed job growth in July was much weaker than anticipated, and, more importantly, downward revisions to the previous two months were among the biggest on record.
But these ominous signals were offset by accelerating wage growth, an increase in hours worked, and a meager rise in the unemployment rate. Hardly signs of a shaky labor market.
Nevertheless, markets focused more on the softer elements in the jobs data, suggesting investors think the Fed’s bar to easing is much lower than the bar to standing pat. Indeed, the rates market is now pricing in a near-100% chance of a cut at the U.S. central bank’s September 16-17 meeting.
RISK MANAGEMENT
But markets may be getting ahead of themselves.
Powell has indicated that a rise in the unemployment rate is needed for the Fed to act. But that rate is potentially being distorted by post-pandemic labor supply issues - employers’ reluctance to fire workers and Trump’s immigration policies are limiting the number of people looking for work.
Regardless, cutting before seeing a meaningful rise in the unemployment rate would be tough to justify, creating a significant communications problem for Powell.
And on a more fundamental level, as economist Phil Suttle noted on Tuesday, is preparing to cut rates at full employment just as inflation is accelerating good risk management?
This is a particularly apt question when looking at financial markets: the S&P 500 and Nasdaq, gold, and bitcoin are all near record highs, and corporate bond spreads are the tightest in years. This hardly looks like a restrictive policy environment.
In that light, patience and caution would appear justified, especially given the added risk of appearing to buckle under Trump’s political pressure. If the Fed wants to cut, Powell could use some cover. Unfortunately for him, he’s unlikely to find that in this noisy data.
What could move markets tomorrow? * Australia unemployment (July) * China’s JD.com earnings (Q2) * UK GDP (Q2, preliminary) * UK industrial production (June) * UK trade (June) * Euro zone GDP (Q2, flash estimate) * Euro zone unemployment (Q2) * Euro zone industrial production (June) * U.S. weekly jobless claims * U.S. producer price inflation (July) * U.S. Fed officials on the stump: Richmond Fed PresidentThomas Barkin, St. Louis Fed President Alberto Musalem * U.S. earnings - Cisco Systems, Deere & Company
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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7 months ago
Trading Day: World stocks boom, Fed cut looms
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Stocks around the world raced to fresh highs on Tuesday, with investors betting that U.S. inflation is tame enough to pave the way for a rate cut next month, although they remain on edge over the pressure President Donald Trump continues to bear on the Fed and other public and private sector institutions.
More on that below. In my column today I look at Latin American currencies and ask whether their attractive "carry" will be enough to sustain their remarkable outperformance so far this year.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump weighing lawsuit against Fed’s Powell overrenovations, White House says 2. Trump rebukes Goldman’s Solomon and bank’s economicsresearch on tariff impact 3. Trump picks Heritage economist Antoni to lead U.S. laborstatistics agency 4. AI startup Perplexity makes bold $34.5 billion bid forGoogle’s Chrome browser 5. Treasuries have dozed off for the summer: Mike Dolan
Today’s Key Market Moves * FX: Dollar weakens 0.5% as Fed rate cut bets strengthen. * STOCKS: New highs for Japan’s Nikkei 225 and TOPIX,Australia’s ASX, the S&P 500, Nasdaq and MSCI All Countrybenchmarks. Russell 2000 U.S. small caps index +3%, best daysince May. * SHARES/SECTORS: All 11 sectors in the S&P 500 rise, ledby communications +1.8%. U.S. airlines fly: United +10%, Delta+9%. Japan’s Softbank (OTC:SFTBY) +7%, taking gains in past week to ~30%. * BONDS: Treasury yields dip 3 bps at the short end andrise up to 4 bps at the long end. Curve steepest in a month. * COMMODITIES: Oil falls, WTI futures down 1.2% towards$63/bbl. Demand and supply issues at play, traders also lookingahead to Trump-Putin meeting in Alaska on Friday.
Today’s Talking Points:
* Weakness in the long end of the U.S. bond market and steepening of the yield curve. Reasons? Unease about the apparent certainty of a rate cut next month, deepening concern over Fed credibility and independence in the face of Trump’s pressure on Chair Jerome Powell. On Powell’s potential replacements, James Bullard and Stephen Miran both stressed on Tuesday that Fed independence is of paramount importance.
* Deepening unease around Trump’s interference in the economic arena. He has intensified his verbal attacks on Powell for not cutting rates, and is considering a lawsuit against him related to renovations at the Fed’s Washington HQ. He has fired the Bureau of Labor Statistics commissioner, called for the CEO of Intel (NASDAQ:INTC) to resign, and on Tuesday hit out at Goldman Sachs’ CEO and chief economist for the bank’s analysis of the impact of tariffs.
* Another whoosh in U.S. and global equities, which lifts many benchmark indices to new highs. With Trump’s trade war on pause and the earnings season winding down, AI-related optimism and rate cut hopes are underscored by Perplexity AI’s unsolicited $34.5 billion all-cash offer for Alphabet (NASDAQ:GOOGL)’s Chrome browser, and July’s in-line CPI inflation report.
High-flying LatAm currencies may struggle to carry on
As U.S. President Donald Trump has upended many global economic norms this year, investors have faced several counterintuitive swings, including the dollar’s plunge and record highs in bitcoin and U.S. stocks.
Now we can add another to that list: the stellar outperformance of Latin American currencies against the dollar.
At the start of the year Mexico’s peso was thought to be particularly vulnerable to looming U.S. tariffs, and domestic fiscal concerns were expected to limit the Brazilian real’s upside.
But last week, one index tracking the region’s currencies against the greenback, MSCI’s International EM Latin America Currency Index, rose to the highest level since it was launched in 2009, bringing its year-to-date gains up to 20%.
For comparison, MSCI’s EM Asian currency index and global EM currency indexes both peaked in early July, but their year-to-date gains at that time were only around 7%. And both have eased back since.
Bank of America analysts estimate that Latin American currencies have appreciated more than 5% this year in real terms, moving from 3.2% undervalued to 2.2% over-valued versus averages over the last decade.
What accounts for this outperformance? And, perhaps more importantly, can it continue?
CARRY ON
Price was obviously one major catalyst here. Many of these currencies were simply cheap at the start of the year. The Brazilian real and Mexican peso both depreciated around 20% in calendar year 2024.
But the key factor is ’carry’, the yield and interest rate differential relative to the U.S. dollar. In nominal and inflation-adjusted terms, the carry in Latin America is among the highest in the world, thanks to borrowing costs in Mexico and particularly Brazil.
The Brazilian central bank’s benchmark Selic rate is an eye-popping 15%, and even factoring in above-target inflation, real rates and bond yields are still close to 10%. Mexico’s central bank may have cut rates 325 basis points in the past year, but its policy rate is still more than 330 bps higher than the U.S. fed funds rate.
When you factor in the liquidity of these two currencies relative to most of their EM counterparts, you can see why foreign investors have flocked to them. The real is up 14% against the dollar this year, and the peso is up 12%. Even the Colombian peso, facing headwinds from a renewed wave of domestic political violence and uncertainty, is up 10% this year.
Citing high real carry, analysts at UBS and Barclays remain positive on emerging market currencies, including Latin America’s big two. That’s partly because the gap with U.S. rates is likely to persist, especially in Brazil, even if local rates fall, given that the Fed may soon be easing policy as well.
RETHINK
Upside potential in the second half of the year is bound to be capped, however, precisely because of the bumper gains in the first six months.
Emerging market local currency government bonds have returned 12% in dollar terms this year, while EM stocks are up 16%, outpacing hard currency bonds (+7%), U.S. corporate bonds (+5%), U.S. Treasuries (+4%), and U.S. equities (+8%), according to Bank of America.
"This strong rally is prompting many investors to reassess their exposure to EM rates and currencies," BofA analysts wrote last week.
This exposure was highlighted in BofA’s August global fund manager survey released on Monday. The closely-watched poll showed that investors’ biggest rotation recently has been into emerging markets, with a 15 percentage point jump from the month before. Their largest overweight position now, by some distance, is in EM assets.
Significantly – and perhaps ominously from an exchange rate perspective – investors’ biggest short position is in the U.S. dollar.
And when considering headwinds, we can’t forget tariffs. While the vulnerabilities in Asian countries have been a key investor focus, Brazil is also clearly in Trump’s line or fire, as it faces 50% tariffs on many of its U.S.-bound goods. Trade talks between Brasilia and Washington have broken down completely, with President Luiz Inacio Lula da Silva saying U.S.-Brazil relations are at a 200-year low.
Mexico has more breathing room, having secured a three-month truce to safeguard the U.S.-Mexico-Canada Agreement (USMCA), stave off 30% levies, and negotiate a broader trade deal. But until the ink dries, uncertainty will persist.
The Trump 2.0 era has taken markets on a wild ride with many unexpected turns. Latin American exchange rates have enjoyed a dramatic upward climb, and while this doesn’t mean they’ll necessarily plummet, investors may want to buckle up.
What could move markets tomorrow? * Chinese corporate earnings, including Tencent, LenovoGroup * Thailand interest rate decision * Japan tankan survey (August) * Japan producer prices (July) * U.S. Fed officials on the stump: Richmond Fed PresidentThomas Barkin, Chicago Fed President Austan Goolsbee, AtlantaFed President Raphael Bostic * Bank of Canada minutes
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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TRADING DAY World stocks boom, Fed cut looms - Reuters
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Trading Day: Wall St momentum calms tariff shakes
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Wall Street rallied on Wednesday as investors continued to take their cue from earnings and AI-related optimism over tariffs, while a weak 10-year Treasury note auction served as a reminder of the precarious U.S. fiscal situation.
More on that below. In my column today I look at how investors’ apparent readiness to accept tariffs challenges the orthodoxies that have underpinned economic liberalism and world markets for the past 40 years.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump imposes additional 25% tariff on Indian goods,relations hit new low 2. India-U.S. spat over trade and oil threatens widerfallout 3. Lula rejects ’humiliation’ of calling Trump overU.S.-Brazil tariff 4. Biden-era appointees could stymie Trump’s effort toreshape Fed 5. Bank of England’s long unwinding road: Mike Dolan
Today’s Key Market Moves * FX: Dollar index falls 0.5%, its fourth straightdecline. Brazil’s real rises 0.8% to a one-month high of 5.45/$. * STOCKS: Nasdaq climbs 1.2%, the best performing majorindex on Wall St. * SHARES/SECTORS: U.S. consumer discretionary index +2.5%,consumer staples index +1.8%. Apple (NASDAQ:AAPL) +5%, Super Micro Computer-18%. * BONDS: A weak 10-year Treasury auction pusheslonger-dated yields up as much as 5 bps, steepening the curve. * COMMODITIES: Oil falls for a fifth day, hits newfive-week lows after U.S. Secretary of State Marco Rubiosuggests there may be an announcement on potential sanctionsagainst Russia.
Wall St momentum calms tariff shakes
Positive investor sentiment and risk appetite were on full display on Wednesday, as optimism around corporate earnings and the U.S. tech boom again overshadowed more worrisome global developments on tariffs and growth.
Traders cheered news that ChatGPT maker OpenAI is mulling a stock sale that could value the company at $500 billion and Apple’s pledge to spend $100 billion on U.S. manufacturing. U.S. earnings continue to surprise to the upside too, and the S&P 500 consumer discretionary index rose 2.4%, its best day since May.
Wall Street stood in contrast to a more subdued global session. Benchmark Asian, emerging and European indices were all flat on Wednesday, with the Trump administration’s tariffs weighing on sentiment across the board.
The major exception was China, where blue chip stocks closed at their highest in more than three and a half years on hopes that the United States and China will strike a trade deal in the coming days.
Trade-related optimism elsewhere, however, is in much shorter supply. U.S. President Donald Trump on Wednesday slapped further import duties on India, bringing the total tariff rate to 50%, while Brazil’s President Luiz Inacio Lula da Silva told Reuters that relations with the U.S. are at a 200-year low.
Some Fed officials, meanwhile, are signaling growing unease about the U.S. labor market and economy. Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly on Wednesday said interest rates should probably be lowered in the coming months.
In bonds, a weak $42 billion sale of 10-year U.S. government bonds drew the weakest demand in a year, and followed a somewhat disappointing auction of $58 billion three-year notes the day before. Thursday’s $25 billion sale of 30-year bonds will come under even greater scrutiny.
Also on Thursday, the Bank of England is widely expected to cut its key interest rate to 4% from 4.25%. But the challenges facing the Bank are significant - the fiscal outlook appears to be deteriorating sharply, and inflation is close to double the central bank’s 2% target.
Before that China announces July trade data, with economists expecting export growth to slow and the surplus to narrow. Earlier this week, official U.S. figures showed that the U.S. trade gap with China in June shrank to its lowest in more than 21 years.
Markets’ tariff resilience challenges long-standing economic orthodoxy
Investors have been living in a real-time economic experiment ever since U.S. President Donald Trump returned to the White House in January.
Whether it’s tariffs, "America First" isolationism, overt politicization of independent economic institutions, or upended global economic norms, markets are having to deal with challenges few investors have faced before.
So how are they reacting to the leader of the free world ripping up the economic playbook that has shaped the global financial system for 40 years?
Wall Street and world stocks are at record highs, U.S. high yield corporate bond spreads are the tightest since before the 2007-08 global financial crisis, and Treasuries are remarkably calm, with the 10-year yield below its average of the last two years.
It’s not all serene, of course. The U.S. "term premium" - a measure of the extra compensation investors demand for holding long-dated Treasuries over short-term debt - is the highest in over a decade. Inflation expectations and long-dated yields have shot up too.
And one needs to acknowledge that the full impact of Trump’s tariffs has yet to be fully felt.
But, at this point there has been no U.S. recession, even if growth is slowing. And the market plunge on the back of Trump’s April 2 "Liberation Day" tariff debacle lasted a few weeks.
The powerful stock market recovery since then suggests investors were less bothered by the actual tariffs than the shock of the initial announcement, the chaotic way it was delivered, and the amateurish way the levies were calculated.
This outcome is not what economic textbooks would have predicted.
ONE FOR YOU, 19 FOR ME
Tariffs are a tax.
And the overall U.S. average effective tariff rate looks likely to be around 18%, according to the Budget Lab at Yale. That’s down from an estimated 28% in May but still nearly eight times higher than the level in December.
Who will ultimately pay this tax is up for debate, but if sustained at that level, the president of the United States will have effectively imposed a tax hike worth around 1.8% of GDP, one of the largest in U.S. history.
But wait. Aren’t higher taxes bad for business, markets and growth? Don’t higher taxes sap consumers’ spending power, stunt investment and hiring, and crush the private sector’s entrepreneurial spirit?
Markets’ relatively speedy acceptance raises the question: What happened to the last 40 years of economic orthodoxy, symbolized by the so-called "Washington Consensus"?
This was the set of principles drawn up in the late 1980s that broadly mirrored the views of the Washington-based International Monetary Fund, World Bank and U.S. Treasury, ostensibly to help direct policy in Latin America but which ultimately served as the economic framework for Western liberal democracies and global markets.
They included support for privatization, deregulation, the free flow of capital, fiscal discipline, and lower taxes. They also entailed lower barriers to trade, a cornerstone of globalization.
For years these tenets were regarded by policymakers, business leaders and investors as sacrosanct. Some, like rigid adherence to tight fiscal policy, were put to the test - and shown to be flimsy, at best - during the GFC and pandemic.
So now that the tariff line has been crossed, what about other economic commandments? Could governments look to raise tax revenue from other sources, such as wealth taxes on the super rich, a "Tobin tax" on foreign exchange transactions, or other "soft" capital controls?
These are obviously anathema to the doctrine of free market capitalism. But then so were tariffs.
To be fair, we are just entering this new era. And as my colleague Mike Dolan observed earlier this week, even if tariffs don’t send the economy or markets into a tailspin, they may still lead to a "slow burn," with many years of lost economic potential, elevated volatility and lower investment returns.
But investors aren’t looking that far ahead. What they see right now is a pretty resilient U.S. economy, solid earnings growth, and red-hot optimism around U.S. tech and AI. And some of the old orthodoxies may be in the rear-view mirror.
What could move markets tomorrow? * Australia trade (June) * Japan earnings, including Softbank (OTC:SFTBY), Sony (NYSE:SONY), Toyota (NYSE:TM) * China trade (June) * China FX reserves (June) * Bank of England interest rate decision * Germany trade (June) * Germany industrial production (June) * U.S. weekly jobless claims * U.S. Treasury auctions $25 bln of 30-year bonds * U.S. earnings including Eli Lilly (NYSE:LLY), ConocoPhillips (NYSE:COP), GileadSciences, Motorola (NYSE:MSI) * Atlanta Fed President Raphael Bostic speaks
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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7 months ago
Trading Day: Stagflation-ISM
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Wall Street bucked the positive global equity trend and closed mostly lower on Tuesday, as U.S. service sector data rekindled stagflation fears and shined a light on the difficult position the Federal Reserve may find itself in next month.
More on that below. In my column today I look at the tumult of the last few days that has seen the worlds of U.S. politics, policy, and company earnings collide, exposing the big divergences that run through the country’s equity and bond markets.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump rules out Bessent for Fed chair 2. Easy to lose, hard to restore: US data trust on the line 3. EU still expects turbulence in trade relations with US 4. Markets struggle to price smoke and mirrors: Mike Dolan 5. Brazil’s economy ready to ride out Trump’s 50% tariff
Today’s Key Market Moves * FX: Dollar index is flat. The yen is the big mover inG10 FX, slipping around 0.3% vs dollar and euro. * STOCKS: S&P 500, Nasdaq and Dow fall, Russell 2000rises. Benchmark Asian, Chinese, European, emerging indexes allrise. * SHARES/SECTORS: Seven S&P 500 sectors fall, led byutilities -1%; materials index +0.8%. Palantir (NASDAQ:PLTR) shares +7.8%. * BONDS: U.S. yields creep higher, up 4 bps at the shortend, flattening the curve. 3-year auction is on the weak side. * COMMODITIES: Oil falls 1.7%, Brent crude futures hit afive-week low of $67.52/bbl. WTI nudges $65/bbl.
Stagflation-ISM
The stagflation red flags raised by U.S. service sector activity figures on Tuesday are a reminder that the world’s largest economy and most important central bank face significant challenges in the months ahead.
Investors took their cue more from the bubbling price pressures in the ISM services report than the signs of softening activity. Treasury yields crept up and rate cut expectations were trimmed as a result.
Still, it’s a curious one. Wall Street’s slump on Friday went hand in glove with plunging yields and a dramatic surge in rate cut bets. Today, a hawkish tilt in the bond and rates futures markets was accompanied by a broad-based equity selloff.
There are other factors at play, not least the barrage of Q2 earnings, tariff headlines, and a renewed spike in policy uncertainty. But these moves are a reminder that there can be good and bad reasons driving yields up or down, and that the correlation with stocks can flip from one day to the next.
The ISM report showed service sector activity in June flatlined while the prices paid index rose to its highest in nearly three years. Tariffs, inflation pressures, growth fears are all in the mix.
Contrast this with China’s services activity data released on Tuesday, which showed the fastest pace of expansion in July in 14 months.
U.S. corporate earnings have generally been strong. Of the 330 companies in the S&P 500 that had reported through last Friday, 80.6% reported consensus-beating profits, compared with the long-term average of 67.1%, according to LSEG data. But Caterpillar (NYSE:CAT) warned on Tuesday that tariffs pose significant challenges and could cost the firm up to $1.5 billion this year.
Meanwhile, U.S. President Donald Trump told CNBC on Tuesday that he will not nominate Treasury Secretary Scott Bessent for a position on the Fed’s Board of Governors, thus ruling him out as a candidate for Fed chair. Trump said he will announce Governor Adriana Kugler’s replacement "very shortly."
Trump also said the U.S. is "very close" to a trade deal with China and that he would meet his Chinese counterpart Xi Jinping before the end of the year if an agreement is struck.
Looking ahead to Wednesday, there are two highlights in the Asian calendar for investors to home in on - the latest Chinese trade figures, and an interest rate decision from the Reserve Bank of India (NSE:BOI).
The RBI is expected to keep its benchmark repo rate on hold at 5.50%. But in light of the steep tariffs recently imposed on Indian exports by the U.S., traders are putting a near one-in-six chance of a rate cut. Likely RBI intervention on Tuesday kept the rupee from hitting new lows through 88.00 per dollar.
China’s trade figures, meanwhile, will be closely watched after official U.S. data on Tuesday showed America’s trade deficit with its Asian rival shrank in June to its lowest in more than 21 years. In light of the contrasting PMI figures on Tuesday, this will be worth keeping an eye on.
Navigating US markets’ split personalities
During an extraordinary few days when the worlds of U.S. politics, policy, economics and company earnings collided, the divergences that run through the country’s equity and bond markets have come into sharp relief.
For the bond market, the split separates short-dated Treasuries that price off the Fed’s policy rate and longer maturities that are more sensitive to U.S. debt and deficit concerns.
For the benchmark S&P 500, that line is between the ’Magnificent Seven’, along with a few other tech and artificial intelligence-focused megacaps, and everyone else.
These types of divides have always existed to some extent, but they have become more apparent this year given the historic concentration on Wall Street and rapid deterioration in the U.S. fiscal outlook.
The dramatic moves in U.S. assets over the last few days serve as a microcosm of these deeper divergences.
LONG AND SHORT OF IT
The split in the bond market burst open on Friday.
Triggered by surprisingly weak jobs figures and Trump’s shock decision to fire a senior official in the agency responsible for collecting the data, the two-year Treasury yield plunged 25 basis points and the 2s/30s yield curve steepened by 20 basis points. These were the biggest moves in one year and two and a half years, respectively.
The slump in yields, especially at the short end of the curve, indicates that investors’ supposed concerns about fiscal indiscipline quickly evaporate as soon as growth-sapping cracks in the labor market appear. So much for the bond vigilantes.
Tellingly, there was no pullback on Monday. Indeed, Treasury prices climbed even higher, pushing the two-year yield as low as 3.66%, its nadir since May.
Long-dated yields have declined too, but not as aggressively, resulting in Friday’s dramatic steepening of the 2s/30s curve to levels that, with the exception of April’s brief tariff tantrum, haven’t been seen for more than three years.
Investors may wince at the size of the federal debt and the Treasury’s funding needs but still want to load up on two-year bonds when they think rate cuts are coming. This parallel thinking isn’t new, but the stark difference in the narratives driving the front and back ends of the curve is notable.
STAY NIMBLE
The U.S. equity market concentration story is familiar to everyone by now, but the last few days underscore how jaw-dropping - and seemingly entrenched - it is.
Blockbuster earnings reports from ’Mag 7’ constituents Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) juiced another wave of outperformance in Big Tech stocks, reviving debate about concentration risk, bubbles and the long-term benefits of AI.
By some measures, a few Big Tech firms now account for as much as 40% of the total U.S. stock market cap. Tech is more expensive relative to the broader S&P 500 index than ever, even compared to the dotcom bubble, according to Bank of America.
Wall Street’s average valuations and earnings growth are therefore increasingly being driven by Big Tech. Strip out the top 10 firms, and the rump S&P 490 has barely registered any earnings growth in the last three years, according to SocGen’s Andrew Lapthorne.
Again, there are multiple narratives at work here. It may be true that overseas investors want to reduce their U.S. equity exposure, but don’t want to miss out on the Big Tech boom. So even if foreign investors start shedding some U.S. assets – and that’s debatable – they aren’t apt to be jettisoning the likes of Nvidia (NASDAQ:NVDA) and Microsoft.
This is a delicate juncture for investors. Wall Street is at record highs, but concentration risk has also rarely been higher. The outlook for long-dated bonds is worrying given current fiscal and inflation dynamics, yet the short end looks much more attractive, though even that is complicated by the economic and unique political pressures bearing down on the Fed.
The divergences in U.S. markets may narrow, gradually or suddenly, or they may continue unabated for some time. Without a crystal ball, it’s tough to know exactly what the catalyst for mean reversion would be.
One thing is likely guaranteed though: in this environment, it will pay to be nimble.
What could move markets tomorrow? * China trade (July) * India interest rate decision * Taiwan inflation (July) * UK PMI (July) * Germany industrial production (June) * Euro zone retail sales (June) * U.S. Treasury auctions $42 bln of 10-year notes * U.S. earnings including McDonald’s (NYSE:MCD), Disney (NYSE:DIS), Uber (NYSE:UBER), DoorDash (NASDAQ:DASH) * U.S. Fed officials speak: Governor Lisa Cook and BostonFed President Susan Collins at the same event; San Francisco FedPresident Mary Daly
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Bill Berkrot)
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7 months ago
Trading Day: Stocks bounce back, bonds more cautious
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
Investors shrugged off last week’s worries over the U.S. economy to drive a powerful, tech-led rebound across global stocks on Monday, although U.S. Treasuries prices held onto Friday’s gains, suggesting a fair degree of caution persists.
More on all that below. In my column today I look at why rather than firing the head of the Bureau of Labor Statistics, President Donald Trump could have claimed that the weak jobs data and dramatic market reaction vindicated his stance that the Fed should cut rates.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Brexit’s parallels with Trump tariffs tell a tale: MikeDolan 2. Never mind Wall Street records, investors rethink USmarket supremacy 3. Latest Trump tariffs unlikely to budge, top negotiatorsays 4. BOJ gears up to hike rates again but leaves free hand ontiming 5. BP (NYSE:BP) makes its largest oil and gas discovery in 25 yearsoffshore Brazil
Today’s Key Market Moves * FX: Most emerging currencies rise against a soft dollar.MSCI’s LatAm FX index has biggest 2-day rise in 2 months. * STOCKS: Main Asian, European, U.S. global indices allrise strongly. Nasdaq and the Russell 2000 lead U.S. rally, bothup 2%. * SHARES/SECTORS: S&P 500 communications index +2.6% andtech index +2.2%. Nvidia (NASDAQ:NVDA) shares +3.6%, Tesla (NASDAQ:TSLA) +2.2%. * BONDS: Treasuries prices rise, pushing 2-year yield to a3-month low of 3.66%. Yields down 2 bps across the curve. * COMMODITIES: Oil falls around 1.5% to its lowest in aweek after OPEC+ agrees to another large output increase.
Stocks bounce back, bonds more cautious
After getting slammed on Friday by unexpectedly poor U.S. employment figures, U.S. and world stocks rebounded on Monday. Whether this is a short-term technical recovery or the resumption of the bull run of recent months remains to be seen.
In isolation, the positive start to the week has been pretty impressive. Wall Street more than recovered the ground it lost on Friday, led by the Nasdaq and Russell 2000, as investors bet that both tech and small caps would be among the big winners in a lower interest rate world.
The global recovery was probably overdue. The MSCI All Country index’s rise on Monday snapped a six-session losing streak, its worst run in nearly two years.
While Friday’s slump in U.S. bond yields reflected deepening growth fears and contributed to the huge equity selloff, the further drift lower in yields on Monday supported equity sentiment.
The feel good factor could prove fleeting though. The U.S.-centric issues that drove last week’s selloff - growth fears, tariff concerns and unusually high levels of policy uncertainty - haven’t disappeared.
Trump said on Monday he will substantially raise tariffs on goods from India over its Russian oil purchases, while Switzerland says it is ready to make a "more attractive offer" to Washington to avert the steep 39% tariffs it is facing.
Investors are increasingly nervous about political interference in independent U.S. institutions after Trump fired Bureau of Labor Statistics Commissioner Erika McEntarfer for allegedly rigging the jobs data. This comes amid Trump’s verbal attacks on Fed Chair Jerome Powell for not cutting interest rates, and as he prepares to announce his nomination to replace Fed Governor Adriana Kugler, who surprisingly resigned on Friday.
Looking ahead to Tuesday, the U.S. earnings calendar heats up again and purchasing managers index data will give an insight into how the service sectors in many of the world’s major economies fared in July.
Trump scores major own goal with labor official firing
U.S. President Donald Trump’s decision to fire a top labor official following weak jobs data obviously sends ominous signals about political interference in independent institutions, but it is also a major strategic own goal.
Trump has spent six months attacking the Federal Reserve, and Chair Jerome Powell in particular, for not cutting interest rates. The barbs culminated in Trump branding Powell a "stubborn MORON" in a social media post on Friday before the July jobs report was released.
The numbers, especially the net downward revision of 258,000 for May and June payrolls growth, were much weaker than expected. In fact, this was "the largest two-month revision since 1968 outside of NBER-defined recessions (assuming the economy is not in recession now)," according to Goldman Sachs.
This sparked a dramatic reaction in financial markets. Fed rate cut expectations soared, the two-year Treasury yield had its steepest fall in a year, and the dollar tumbled.
A quarter-point rate cut next month and another by December were suddenly nailed-on certainties, according to rate futures market pricing. This was a huge U-turn from only 48 hours before, when Powell’s hawkish steer in his post-FOMC meeting press conference raised the prospect of no easing at all this year.
Trump’s constant lambasting of "Too Late" Powell suddenly appeared to have a bit more substance behind it. The Fed chair’s rate cut caution centers on the labor market, which now appears nowhere near as "solid" as he thought.
Trump could have responded by saying: "I was right, and Powell was wrong."
Instead, on Friday afternoon he said he was firing the head of the Bureau of Labor Statistics, Commissioner Erika McEntarfer, for faking the jobs numbers. Trump provided no evidence of data manipulation.
So rather than point out that markets were finally coming around to his way of thinking on the need for lower interest rates, Trump has united economists, analysts and investors in condemnation of what they say is brazen political interference typically associated with underdeveloped and unstable nations rather than the self-proclaimed ’leader of the free world.’
"A dark day in, and for, the U.S.," economist Phil Suttle wrote on Friday. "This is the sort of thing only the worst populists do in the worst emerging economies and, to use the style of President Trump, IT NEVER ENDS WELL."
UNCERTAINTY PREMIUM
It’s important to note that major – even historic – revisions to jobs growth figures are not necessarily indicative of underlying data collection flaws. As Ernie Tedeschi, director of economics at the Budget Lab at Yale, argued on X over the weekend: "BLS’s first-release estimates of non-farm payroll employment have gotten more, not less, accurate over time."
It should also be noted that the BLS compiles inflation as well as employment data, so, moving forward, significant doubt could surround the credibility of the two most important economic indicators for the U.S. - and perhaps the world.
Part of what constitutes "U.S. exceptionalism" is the assumption that the experts leading the country’s independent institutions are exactly that, independent, meaning their actions and output can be trusted, whatever the results.
Baseless accusations from the U.S. president that the BLS, the Fed and other agencies are making politically motivated decisions to undermine his administration only undermine trust in the U.S. itself.
"If doubts are sustained, it will lead investors to demand more of a risk premium to own U.S. assets," says Rebecca Patterson, senior fellow at the Council on Foreign Relations. "While only one of many forces driving asset valuations, it will limit returns across markets."
This furor comes as Fed Governor Adriana Kugler’s resignation on Friday gives Trump the chance to put a third nominee on the seven-person Fed board, perhaps a potential future chair to fill that slot as a holding place until Powell’s term expires in May. Whoever that person is will likely be more of a policy dove than a hawk.
Policy uncertainty, which had been gradually subsiding since the April 2 ’Liberation Day’ tariff turmoil, is now very much back on investors’ radar.
What could move markets tomorrow? * China, Japan, euro zone services PMIs (July) * South Korea inflation (July) * U.S. services PMI, ISM (July) * U.S. trade (June) * U.S. Treasury auctions $58 bln of 3-year notes * U.S. earnings including Caterpillar (NYSE:CAT), AMD (NASDAQ:AMD) and Pfizer (NYSE:PFE)
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Bill Berkrot)
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7 months ago
Trading Day: Powell in no rush to cut
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
The dollar and U.S. bond yields rose while Wall Street mostly fell in an eventful session on Wednesday, as investors digested U.S. and euro zone GDP figures, new tariffs from the White House, and Fed Chair Jerome Powell’s press conference after the central bank left interest rates on hold.
More on all that below. In my column today I look at why Brazil may be holding the world’s worst hand in the game of trade negotiation poker with the Trump administration. And it’s due to politics, not economics.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Rebound in US economic growth in second quarter masksunderlying slowing trend 2. Euro zone growth holds up better than feared in Q2 3. Trump says US to hit India with 25% tariff startingAugust 1 4. Bank of Canada holds rates steady and says global tradewar risk has eased 5. IMF could do with a bigger crisis than it forecasts:Mike Dolan
Today’s Key Market Moves * FX: Dollar accelerates rally, rising 1% on an indexbasis to a two-month high. * STOCKS: Wall Street gives back earlier gains. S&P 500and Nasdaq end 0.1% either side of flat, Dow down 0.4%. * SHARES/SECTORS: Microsoft (NASDAQ:MSFT) shares jump 6%, Meta (NASDAQ:META) sharesleap 10% in after-hours trade following Q2 results. * BONDS: U.S. Treasury yields rise across the curve, asmuch as 6 bps at the short end as September rate cut hopes fade. * COMMODITIES: Comex copper futures plunge nearly 20% onTrump’s new tariffs. Platinum falls 6%, gold down 3%.
Powell in no rush to cut
Surprisingly strong U.S. growth figures and Federal Reserve Chair Jerome Powell’s press conference were the chunkiest plenty else to feast on for investors on Wednesday, but they had plenty other morsels to chew on too.
Investors had upbeat euro zone growth figures, a rate decision from Canada, and new U.S. tariffs on India, Brazil and copper imports on their plate, and if that wasn’t enough, after-the-bell earnings from Meta and Microsoft for dessert.
The overarching message that investors took from Powell’s press conference after the Fed left its Fed Funds target range at 4.25-4.50% was this: The central bank is in no rush to cut rates, despite the rare dissent from two policymakers to do so.
Powell said the labor market is strong and effectively at full employment, so that side of the Fed’s dual mandate is being met. But inflation is above target and the outlook remains cloudy due to the impact from tariffs, so the inflation side of the dual mandate is not being met. Taken together, policy is rightfully "modestly" restrictive.
Markets reacted accordingly - rates traders slashed their expectations of a rate cut in September, and are now only fully pricing in a cut by December. The dollar and yields extended their gains, and Wall Street erased its gains.
The most dramatic market reaction was in FX. The Dollar Index leaped 1% to a two-month high and is on track for its best week in three years. On the flip side, the euro is down more than 2% since Monday and on track for its biggest fall in three years.
On the economy, Powell said the first estimate of Q2 GDP was broadly as policymakers had anticipated. The U.S. economy expanded at a 3.0% annualized rate in the second quarter, faster than the consensus forecast of 2.4%. On the face of it, this looks nothing but bullish.
But that was skewed by a record rebound in net trade, which followed a record negative contribution from net exports in the first quarter. Private domestic final purchases, a gauge of underlying demand, rose at its slowest pace since 2022.
In effect, headline growth is masking weaker underlying data. Most economists agree that the highest tariff rates since the 1930s will likely hurt the U.S. economy to some degree at some point. But right now, the pain appears just about manageable.
Trump spat leaves Brazil holding world’s worst tariff hand
U.S. President Donald Trump has tempered his most belligerent trade threats and begun striking deals with major partners, meaning most countries won’t face the punishing tariffs announced on ’Liberation Day’. Not so with Brazil.
In fact, Brazil’s trajectory has gone in the opposite direction. On April 2, Brazil faced the minimum 10% tariff rate, but if a deal is not reached by the end of this week, South America’s largest economy is staring at a whopping 50% levy.
That’s significantly higher than the 15% rates negotiated in both the U.S.-Japan and U.S.-European Union deals. Setting aside China, the 50% charge would match the highest levy applied to any country in the Liberation Day tariff program.
And, importantly, the impasse is rooted in politics, not economics. Brazil is one of the few major economies with which the United States runs a trade surplus. Indeed, it has done so every year since 2007, with last year’s goods surplus clocking in at $6.8 billion on a total trade volume of $91.5 billion, U.S. Census Bureau figures show.
Trump has tied the 50% tariffs to judicial moves in Brazil against former right-wing president and ideological ally Jair Bolsonaro, who has been accused of plotting a coup following the storming of government buildings by his supporters after the election victory of leftist President Luiz Inacio Lula da Silva. "LEAVE BOLSONARO ALONE!" Trump wrote on social media earlier this month.
Diplomatic relations are frosty right now, and between Trump and Lula they are downright icy. The prospect of them thawing by the end of this week is negligible.
"Trade deals are a result of negotiations, but there is no dialogue if the U.S. doesn’t respond to our letters. I’m worried," said one Brazilian government official.
THE TARIFF TOLL
Brazilian industry lobby, the CNI, estimates that the imposition of 50% U.S. import tariffs could result in the loss of over 100,000 jobs and knock off 0.2 percentage points from Brazil’s annual economic growth. Brazil’s agribusiness lobby, CNA, warns exports to the U.S. – the country’s second-largest trading partner - could fall by half.
And this is an especially delicate juncture for Brazil.
Foreign exchange flows have turned negative in June and July, and this year’s rally of Brazil’s currency, the real, has stalled. On top of this, foreign direct investment has slowed in recent months.
That is a dangerous development because Brazil’s current account deficit of 3.4% of GDP in the 12 months through June was more than double the deficit a year earlier. At current rates, FDI inflows will no longer cover that gap.
REAL RATES
Given this backdrop, Brazil’s central bank now finds itself in a bind.
Inflation has risen over the last year to eclipse 5%, putting it above the central bank’s upper-band limit of 4.5% for six consecutive months. In response, the central bank has hiked the benchmark Selic interest rate to a two-decade high of 15%.
The central bank is expected to leave the Selic at 15% on Wednesday, and is unlikely to have the wiggle room to cut for several months. High interest rates are needed to get inflation back in its box, attract deficit-plugging inflows from abroad, and support the real.
But the domestic economic price is high. Inflation-adjusted interest rates in Brazil are now around 10%, the highest in the G20 – topping even those of Russia and Turkey – and among the most restrictive real policy rates in the world.
High borrowing costs are, unsurprisingly, slowing credit growth in Brazil, and in June a broad measure of default rates on consumer and business loans rose to its highest level since February 2018.
What’s more, sizeable interest payments are the primary factor behind the ballooning public debt, because nearly half the country’s debt is linked to the Selic rate. Federal public debt expanded by 567 billion reais ($101.53 billion) in the first half of this year, of which 393 billion reais was interest payments.
Brazil’s primary budget, excluding interest payments, is close to balance. But the government’s interest bill is fast approaching 1 trillion reais a year, some 7% to 8% of GDP. This is set to help drive the country’s gross debt-to-GDP ratio above 82% next year from 76% currently.
For policymakers in Brasilia, detente with Washington can’t come quickly enough.
What could move markets tomorrow? * Australia retail sales (June) * China official manufacturing PMI (July) * Bank of Japan interest rate decision * Japan retail sales (June) * Japan industrial production (June) * Taiwan GDP (Q2, prelim) * Hong Kong GDP (Q2, advance) * Samsung (KS:005930) results (Q2) * Japanese earnings including Mizuho, Sumitomo * Germany CPI inflation (July, prelim) * U.S. PCE inflation (June) * U.S. Chicago PMI (July) * U.S. weekly jobless claims * U.S. earnings including Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Mastercard (NYSE:MA)
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever;)
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Trading Day: Tracking trade - from gloom to boom
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
A sense of euphoria washed over global stock markets on Wednesday as a U.S.-Japan trade deal and indications of a U.S.-Europe agreement lifted major indexes around the world, pushing the S&P 500 and MSCI All Country to new highs.
More on that below. In my column today I look at why the U.S. bond market has been so calm lately despite swirling fears over tariffs, deficits and inflation. Foreign demand, especially from the private sector, appears to have returned with a bang.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. U.S.-Japan trade deal averts worst for global economy 2. Japan trade deal breaks U.S. tariff template 3. EU to advance retaliation on U.S. goods as tariff hikelooms 4. AI and gravity-defying U.S. GDP: Mike Dolan 5. U.S. stock market concentration risks come to fore asmegacaps report earnings
Today’s Key Market Moves * S&P 500 and MSCI World hit record highs on investoreuphoria following U.S.-Japan trade deal. * VIX volatility index falls to a 5-month low of 15.32. * Japan’s Nikkei soars 3.5% to a one-year high above 41,000points. Toyota (NYSE:TM) shares leap 14%, biggest rise since 2008. * Eurostoxx futures jump 2% on reports U.S. and EU areclosing in on 15% tariff deal. * The dollar falls for a third day, dragging the dollarindex down towards its recent three and a half-year low.
Tracking trade - from gloom to boom
The tariff pessimism that choked markets immediately following President Donald Trump’s ’Liberation Day’ in early April seems like an age ago. The U.S.-Japan deal and signs of progress on a U.S.-Europe accord injected buoyant stocks with a further dose of adrenaline on Wednesday.
At first blush, the Japan deal looks to be much better than investors had expected, with the U.S. tariff on Japanese imports set at 15% instead of the previously threatened 25%. This includes autos too, the largest single component of the U.S. trade deficit with Japan.
Investors appear to be cheering the 15% rate. If this is the level agreed upon in the U.S.-EU deal, as European diplomats suggest, it will be half the 30% levy Trump is currently threatening to impose. Relative to the worst-case expectations, that’s also a huge relief for markets.
At least that’s how investors are trading it right now. It remains to be seen what the longer-term tariff impact on growth, inflation, consumer spending, and corporate profits will be.
While the tariff relief dominated markets on Wednesday, equity investors also had the latest wave of U.S. earnings to digest - shares in Google’s parent company Alphabet (NASDAQ:GOOGL) fell 2% in after-hours trading, and Tesla (NASDAQ:TSLA) shares rose around 1%.
In bonds, a $13 billion auction of 20-year Treasuries was met with strong demand, selling at nearly two basis points below the market at the bidding deadline. This helped limit the broad rise in yields underway on the back of the trade optimism.
It was a different story in Japan, where the first sale of 40-year debt since Sunday’s upper house election defeat for Prime Minister Shigeru Ishiba logged the weakest demand in almost 14 years. The 40-year yield climbed towards its recent 17-year high, and the 10-year yield hit its highest since 2008.
Ishiba denied reports that he is about to resign. But uncertainty around his future, fiscal policy and the Bank of Japan’s rate path is extremely high.
Thursday’s focus will turn to the European Central Bank, which is expected to pause after eight consecutive rate cuts and keep its deposit rate on hold at 2.00%.
Foreign demand for U.S. Treasuries holds off bond vigilantes
So much for the bond vigilantes.
The U.S. bond market has been remarkably calm lately, despite fears that inflation, tariffs, eroding Fed independence, and Washington’s ballooning debt load will push up Treasury yields. What explains the resilience?
The above concerns remain valid, of course, as any one of them could eventually cast a long shadow over the world’s largest and most important market.
But that doesn’t seem to be on the immediate horizon. The so-called bond vigilantes - those investors determined to bring profligate governments into line by forcing up their borrowing costs - might have been driving bond prices lower earlier this year, but they are taking a back seat now.
The 10-year Treasury yield on Tuesday closed at 4.34%. That’s below the year-to-date average of 4.40%, and less than 10 basis points above the one- and two-year averages.
Perhaps even more surprising, implied Treasury market volatility is hovering at its lowest levels in three-and-a-half years, further evidence that investors have little fear of an imminent spike in borrowing costs.
OVERSEAS DEMAND
The obvious explanation is that demand for Treasuries has picked up, investors lured back into the market by attractive yields on 10-year bonds approaching 5% and even juicer returns on 30-year paper. Concern about an economic slowdown, and thus lower interest rates, is likely adding fuel to this trend.
A lot of this demand has likely come from overseas, based on the latest release of Treasury International Capital flows data. Admittedly, these figures are released with a lag, but they are among the most reliable and closely tracked of all international flows information.
The TIC data show that the foreign official and private sectors bought a net $146.3 billion of U.S. Treasury notes and bonds in May on a non valuation-adjusted basis. That’s the second-highest monthly total ever. And if you include corporate debt, agency bonds and equities, total foreign purchases of U.S. securities in May were the highest on record.
Private sector investors accounted for roughly 80% of that total. Their holdings of U.S. Treasuries began to outstrip official holdings a few years ago, and that trend seems to be accelerating. They now hold over $5 trillion, compared to the official sector’s $4 trillion.
Bank of America’s U.S. rates strategy team notes that outsized foreign private demand has also been evident in more recent flows data, particularly from Japanese investors who have bought more than $60 billion in overseas bonds since the start of May.
Demand from private sector buyers like pension funds is generally thought to be more price-sensitive than reserve managers and sovereign wealth funds, who are more inclined to buy and hold for the very long term.
REGULATION, STABLECOINS
Will the back end of the yield curve remain resilient?
This will obviously depend in part on what happens in the U.S. economy. But there are a few exogenous factors that could boost demand moving forward, including potential regulatory changes to the U.S. banking system and the accelerated adoption of cryptocurrency stablecoins.
First, the Fed has proposed revisions to the supplementary leverage ratio, which would free up capital for banks to hold more Treasuries. That could generate an estimated $1.1 trillion in extra buying capacity.
Next, the increased use of stablecoins, digital tokens that are pegged 1:1 to highly liquid assets like T-bills, short-dated bonds or the U.S. dollar, could drive demand for shorter-dated Treasuries. The House of Representatives last week passed a bill to create a regulatory framework for stablecoins, and U.S. President Donald Trump is expected to sign it into law soon.
HIBERNATING BEARS
Despite all this, there are still plenty of bond bears out there with good reasons to be bearish, not least the $1 trillion flood of new debt issuance expected before this year is out.
But what the market action in the first half of this year has shown – filled as it has been with heightened uncertainty around tariffs, geopolitics, deficits and the Fed – is that bond market selloffs aren’t likely to last long.
That’s partly because of the lack of a true alternative. The near-$30 trillion Treasury market is bigger than the Chinese, Japanese, French, UK and Italian government bond markets combined. And it is more than ten times bigger than the German Bund market, the euro zone’s premium safe-haven asset.
Underlying demand is stronger than the vigilantes have bargained for.
What could move markets tomorrow? * South Korea GDP (Q2, advance) * Japan PMIs (July) * Germany GfK consumer sentiment (August) * Euro zone PMIs (July) * UK PMIs (July) * European Central Bank interest rate decision * U.S. weekly jobless claims * U.S. new home sales (June) * U.S. PMIs (July) * U.S. Treasury auctions $21 billion of 10-year TIPS * U.S. Q2 earnings, including Newmont, T-Mobile, Honeywell (NASDAQ:HON)
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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Trading Day: Equity optimism hard to quell
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
U.S. and world stocks posted solid gains on Monday as the dollar and bond yields fell, while encouraging corporate earnings and investor optimism that the economic damage from tariffs won’t be too severe also boosted risk appetite.
More on that below. In my column today I look at U.S. President Donald Trump’s attacks on Fed Chair Jerome Powell in the broader context of U.S. and global central bank independence.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Cooler euro lets ECB off the hook: Mike Dolan 2. Pausing for breath: Five questions for the ECB 3. Growth and foreign fervour for yield give Japan fiscalwiggle room 4. EU to ramp up retaliation plans as U.S. tariff dealprospects dim 5. Inside a U.S. guitar string maker’s strategy to navigatethe trade war
Today’s Key Market Moves * S&P 500, Nasdaq hit new highs, lifted by communicationsservices and tech. Verizon (NYSE:VZ) is the biggest gainer, up 4%, afterit raised annual profit forecast. * MSCI World index gains 0.2% to fresh peaks too, withstrength in Asia offsetting weakness in Europe. * U.S. Treasury yields slide, down as much as 8 bps at thelong end earlier in the day, flattening the curve. * Dollar index falls 0.6%, its biggest decline in over amonth, led by a 1% slide against the yen. * Gold hits one-month high above $3,400/oz, up 1.4% on theday for its biggest rise in six weeks.
Equity optimism hard to quell
Equity investors have the bit between their teeth. Despite huge uncertainty surrounding U.S. tariffs and trade deals, and unease about Trump’s tirades against Powell, stocks continue to march higher.
Monday’s whoosh was supported by solid U.S. corporate earnings, a weaker dollar and lower Treasury yields. Investors also continue to bet that the economic damage from tariffs will be milder than feared.
U.S. Commerce Secretary Howard Lutnick said on Sunday he was confident of securing a trade deal with the European Union, even as the EU explored possible counter-measures against the United States.
Trump has threatened 30% tariffs on imports from Mexico and the EU, and sent letters to other trading partners, including Canada, Japan and Brazil, setting tariffs ranging from 20% to 50%. This has led experts to raise their running effective aggregate U.S. tariff rate estimates to near 20%.
That would be the highest since 1933 and around eight times higher than they were at the end of last year, although sharply down from the April 2 Liberation Day extremes.
Right now, investors are shrugging this off, and one can understand why. Trump quickly climbed down after the post-Liberation Day market volatility, the August 1 deadline may be pushed back, and the final tariff rates could be different from those announced.
U.S. economic data and second-quarter earnings are generally beating forecasts too. Even if that is because consumers and businesses have, to varying degrees frontloaded purchases, sales or production ahead of the final tariffs, the incoming numbers are solid.
Citi’s U.S. economic surprises index has been rising steadily for the past month, albeit from deeply negative territory, while the equivalent European surprises index is flat-lining and China’s has been falling.
Meanwhile, Japan’s markets reopen on Tuesday after Monday’s holiday, giving stock and bond investors their first chance to react to Sunday’s upper house election which saw the ruling coalition lose its majority. Prime Minister Shigeru Ishiba has vowed to stay in situ, citing the looming August 1 tariff deadline with the United States.
Nikkei futures are currently pointing to a flat open on Tuesday.
Trump’s Fed attacks puncture veneer of central bank independence
If U.S. President Donald Trump’s public attacks on Federal Reserve Chair Jerome Powell have achieved one thing, it has been to thrust the issue of central bank independence firmly into the spotlight. But this raises the question, what does ’independence’ really mean?
Central bank independence is widely considered a bedrock ofmodern-day financial markets. Economists, investors andpolicymakers almost universally agree that monetary policyshould be set for the long-term good and stability of theeconomy, free from short-term and capricious politicalinfluence.
But maintaining that theoretical separation betweenpolicymakers and politicians is very challenging in practice.
Ultimately, central banks are creations of – and, to varyingdegrees, extensions of – their national governments. Thelegislatures determine their statutes, parameters, goals, andkey policymaking personnel.
One need only look at the intertwined and often coordinatedresponses of countries’ central banks and governments to theglobal financial crisis and pandemic for evidence that completeindependence doesn’t actually exist.
DE FACTO OR DE JURE
’Independence’ has two primary meanings in studies ofmonetary policy.
Academic studies often refer to ’de jure’ independence,essentially legal or institutional independence, and ’de facto’or operational independence. Importantly, de jure independenceis no guarantee of de facto independence or vice versa.
Perhaps surprisingly, the U.S. scores pretty low on a dejure basis, mainly because the Fed’s statutes have barelychanged since it was created over a century ago in 1913.
Davide Romelli, associate professor at Trinity CollegeDublin, has updated a central bank independence index created byAlex Cukierman, Steven Webb, and Bilin Neyapti in the 1990s. Theindex, in which 0 is no independence and 1 is totalindependence, shows the US scoring 0.61. That suggests the Fedis a less institutionally independent body than the EuropeanCentral Bank, which scored 0.90, and even the People’s Bank ofChina, which scored 0.66.
But on a de facto basis, the Fed would almost certainly rankas higher than the PBOC, given its design, transparency, andaccountability mechanisms such as the chair’s regular pressconferences and appearances before Congress.
And look at how the Fed resisted the clamor to raiseinterest rates when inflation first exploded after the pandemicas well as its patience in lowering them now given theuncertainty surrounding the U.S. trade agenda. You can argue thewisdom or folly of the Fed’s actions in either case, but bothepisodes put its operational independence on full display.
’BANANA REPUBLIC’
When experts talk about threats to central bankindependence, they are usually referring to concerns about defacto independence.
Indeed, this is why Fed-watchers have grown increasinglytroubled by Trump’s excoriating verbal attacks on Powell overthe last six months for not cutting interest rates. If there isa line demarcating political interference, however amorphous,Trump has crossed it.
"The words that Trump uttered are the ones one expects fromthe head of a banana republic that is about to start printingmoney to fund fiscal deficits," former Fed Chair and U.S.Treasury Secretary Janet Yellen told The New Yorker earlier thismonth.
Of course, even if Trump were to replace Powell with a moreamenable chair, this would not completely eliminate Fedindependence. The Fed chair does not single-handedly setinterest rates and represents only one of 12 votes at eachpolicy meeting.
But in many ways he or she is the first among equals, asUniversity of Maryland’s Thomas Drechsel shows in a recentworking paper.
Analyzing over 800 personal interactions between Fedofficials and each U.S. president from Franklin D. Roosevelt toBarack Obama in 2016, Drechsel found that 92% were with the Fedchair. President Richard Nixon interacted with Fed officials 160times, reflecting his infamous efforts to influence then chairArthur Burns, while only six interactions took place during BillClinton’s two terms.
To be sure, not all meetings or telephone calls involvepolitical pressure, and for purely logistical reasons, it makessense that the president would prioritize speaking with the headof the monetary policy body as opposed to all its members.
As such, appointing the governor is a key area where acentral bank’s independence can be damaged. In a 2022 academicpaper titled "(In)dependent Central Banks" revised in Februaryanalyzing 317 governor appointments in 57 countries betweenJanuary 1985 and January 2020, the authors noted that as centralbanks’ powers – and perceived independence – have expanded,political incentives to control them have intensified,"especially in an era of growing global populism."
Thus, in many cases, the more power a central bank has toignore political pressure, the more motivated government leadersare to apply it. If that is a global trend, Trump appears to beat the vanguard.
What could move markets tomorrow? * Japan’s stock, bond markets react to upper house election * Reserve Bank of Australia minutes of July 7-8 meeting * Taiwan exports (June) * UK public borrowing figures (June) * Bank of England governor Andrew Bailey testifies toparliament * UK Chancellor Rachel Reeves testifies to parliament * U.S. Q2 earnings, focus on Philip Morris (NYSE:PM) and Coca-Cola (NYSE:KO)
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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8 months ago
Trading Day: No tariff clarity, or market movement
- TRADING DAY -Making sense of the forces driving global markets
By Alden Bentley, Editor in Charge, Americas Finance and Markets
Jamie is enjoying some well-deserved time off, but the Reuters markets team will still keep you up to date on what markets were focused on today and why they took a breather. I’d love to hear from you so please feel free to reach out at
Today’s Key Market Moves * On Wall Street the S&P 500 and Nasdaq were almost flat * U.S. Treasury yields rose slightly * The dollar inched higher * Crude oil rose * Gold fell
Today’s Key Reads
From ’fantastic’ to ’spoiled’: How Japan’s trade effort to woo Trump backfired
Gold ETFs drew largest inflow in five years during first half of 2025, WGC say
In the Fed’s hunt for a reason to cut rates, surveys and tariffs make answers elusive
Investors put ’Liberation Day’ lessons to work, scarred by tariff tumult
Trump says steep copper tariffs in store as he broadens his trade war
No tariff clarity, or market movement
Investors let the fluid tariff situation simmer on Tuesday, sitting on their hands a day after knocking stock indexes back from record highs as U.S. President Donald Trump warned that new levies would hit a range of trading partners, including Japan and Korea. While Wall Street was in sideways mode seemingly fatigued by tariff headlines, the beaten down dollar posted the second of back-to-back gains and Treasury yields ticked higher for the fifth day running.
The new date to watch is August 1 with Trump showing again his eagerness to allow time to reach deals by pushing back the deadline, which had been Wednesday since he postponed April’s ill-received opening tariff gambit.
In the meantime the market will stay ready for surprising turns from the White House and otherwise be waiting for economic data, the Federal Reserve and other known unknowns to incentivize trade. No major indicators are on the calendar this week, and the only set pieces to look for Wednesday are the auction of $39 billion of 10-year notes, the Treasury’s benchmark U.S. debt instrument, and the release of minutes from the Fed’s last meeting when they held the policy rate at 4.25%-4.5%, where it has been since December.
Futures show investors expect cuts beginning in September. Last week, we saw the unemployment rate fell in June, while inflation has ticked up, also the wrong direction for easing soon.
The June transcript won’t reveal policymakers in great discord. They weren’t very divided in their economic projections, with 10 seeing several cuts this year and nine effectively pushing easier monetary policy into 2026.
Powell has insisted that any cuts will depend on the data. Meanwhile, the market will wait for the numbers and probably take the minutes in stride too.
What could move markets tomorrow? * US Treasury auctions $39 billion of 10-year Treasury notes * Minutes from Federal Open Market Committee June meeting
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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8 months ago
Tariff headlines and moving deadlines
(Adds headline tag to the article. No changes to text.)
-TRADING DAY
Making sense of the forces driving global markets
By Alden Bentley, Editor in Charge, Americas Finance and Markets
Jamie is enjoying some well-deserved time off, but the Reuters markets team will still keep you up to date on what moved markets today and we’ll take a close look at how markets are digesting the latest U.S. tariff headlines and how they reacted to Tesla (NASDAQ:TSLA) CEO Elon Musk’s move to reclaim political influence. I’d love to hear from you so please feel free to reach out at Alden.Bentley@thomsonreuters.com
Today’s Key Market Moves * US stocks fell on nervousness about Wednesday’s tariffdeadline, while Tesla tumbled after Elon Musk unveiled a newpolitical party * Treasury yields rose as trade talks dragged on andinvestors prepared for auctions this week * The U.S. dollar firmed * Crude oil prices rose despite OPEC plan to increase supplyin August * Gold weakened on the back of the firmer dollar
Today’s key reads
US signals trade announcements imminent as deadline looms
Tesla slides as Musk’s ’America Party’ heightens investor worries
Tesla short sellers set to pocket about $1.4 billion in profits after stock slump
Trump says will impose 25% tariffs on Japan, South Korea
Tariff headlines and moving deadlines
Wall Street paused its bull run to start Monday on the back foot bracing for a barrage of tariff headlines before Wednesday, which U.S. President Donald Trump set as the expiration of a postponement he declared in the wake of the April 2 "Liberation Day" meltdown.
While last week’s record highs for the S&P 500 and Nasdaq suggest that markets are learning to take the White House’s fluid trade tactics in stride, they did pull back even more at midday after Trump said that from August 1 he will impose 25% tariffs on Japan and South Korea, two of the U.S.’s most stalwart trade allies who have yet to reach trade deals with Trump. Trump has promised to notify countries that haven’t reached deals by the July 9 deadline of what their new tariffs will be as of August 1, which now becomes the next big calendar notation for investors. Treasury Secretary Scott Bessent said more trade announcements were likely by Wednesday.
Monday’s pullback aside, the stock market has more than recovered from the April panic, riding out numerous other potential major risks, from Trump’s threats to fire Fed Chair Jerome Powell, to the U.S. bombing of Iran nuclear sites to last week’s passage of the "Big Beautiful Bill" that economists predict will add trillions to the U.S. debt, any tariff revenue notwithstanding. Only the dollar remains deep underwater. Although it bounced nicely on Monday, it is off 7% against the euro since April 2, and the broader dollar index is down about 6%, while the S&P 500 is up 9.5%. The 10-year Treasury note’s benchmark yield is only about 20 basis points higher than its April 2 close, having weathered global concern that the U.S. was no longer a safe place to be invested.
Speaking of the "big beautiful" tax bill, Tesla CEO and former-Trump-ally- turned enemy Elon Musk declared it would bankrupt America and announced the formation of a third U.S. political party, the America Party. Investors immediately tanked Tesla shares, which also weighed on Wall Street, recalling how his stint running Trump’s Department of Government Efficiency was a costly distraction from the business of making electric vehicles and rockets.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.
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8 months ago
Trading Day: Get ready for the jobs report
NEW YORK (Reuters) - -TRADING DAY
Making sense of the forces driving global markets
By Lewis Krauskopf, Markets Reporter
Jamie is enjoying some well-deserved time off, but the Reuters markets team will still keep you up to date on what moved markets today. A long holiday weekend awaits U.S. investors, but not before digesting a heaping portion of economic data and perhaps more developments on fiscal and trade policy. I’d love to hear from you, so please reach out to me with comments at .
Today’s Key Market Moves * Wall Street was back at record levels, with the S&P 500touching a new all-time high, lifted by tech stocks and news ofa U.S.-Vietnam trade deal * The U.S. dollar gained against major currencies,including the yen * UK assets, such as the pound and British bonds, were hithard amid rising concerns over public finances, after thecountry’s finance minister appeared in tears in parliamentfollowing a series of costly U-turns on welfare reforms * Oil prices jumped as Iran suspended cooperation with theU.N. nuclear watchdog * Gold prices firmed, as weaker-than-expected jobs datafueled hopes of impending rate cuts
Today’s Key Reads 1. Trump touts deal to put 20% tariff on Vietnam’s exports 2. Why are bond vigilantes holding back their fire?:Panizza and Gulati 3. Microsoft (NASDAQ:MSFT) to cut about 4% of jobs amid hefty AI bets 4. Emerging market debt sale surge defies global turmoilamid signs of de-dollarisation 5. Foreign investors increase dollar hedges on US stockportfolios
Get ready for the jobs report
U.S. investors have some potentially market-moving developments to chew over before heading out for their July 4 Independence Day gatherings.
Top of mind heading into Thursday is the U.S. employment report for June. Investors may be wary about a disappointment, especially after Wednesday’s weak private payrolls data, which showed a drop for the first time in over two years.
Economists are estimating an increase of 110,000 jobs in U.S. nonfarm payrolls for June, and an unemployment rate of 4.3%. The jobs report will be one of last key economic releases before the Federal Reserve’s next meeting at the end of the month.
A weak jobs report could further fuel expectations for interest rate cuts in coming months. Investors, as indicated by Fed Fund futures, already have been ramping up such bets on the amount of expected easing. September is seen as almost a certainty for the next rate cut, if the central bank does not first ease at the July meeting, which futures suggest is a roughly one-in-four chance.
Wall Street, meanwhile, was back at record high levels on Wednesday, with the benchmark S&P 500 and tech-heavy Nasdaq both rebounding after day-earlier losses.
President Donald Trump said the U.S. struck a trade deal with Vietnam that sets 20% tariffs on many of the country’s exports. Shares of Nike (NYSE:NKE) and other apparel makers rose after news of the trade deal, which would impose a lower than initially expected tariff rate.
The agreement could prove to be an appetizer to more trade news as a closely watched deadline of July 9 nears. That’s when many of the harsh tariffs from Trump’s April "Liberation Day" announcement may go into effect if agreements with trading partners are not reached.
In other policy developments, the House of Representatives was weighing Trump’s massive tax-cut and spending bill, a day after the Senate narrowly passed the legislation. Trump has urged lawmakers to pass the bill by the July 4 holiday.
U.S. Treasury yields were modestly higher on Wednesday amid fiscal concerns about the legislation, which nonpartisan analysts say will add $3.4 trillion to the nation’s debt over the next decade.
Stock and bond markets in the U.S. were set for early afternoon closes on Thursday and will be closed on Friday for the holiday.
What could move markets tomorrow? * US employment report (June) * US ISM services (June) * US factory orders (May) * Fed Atlanta President Bostic speaks
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.
(By Lewis Krauskopf)
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8 months ago
Trading Day: Wall Street’s twin peaks
ORLANDO, Florida (Reuters) -- TRADING DAY
Making sense of the forces driving global markets
I’d love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @reutersjamie.bsky.social.
Just a heads up, Trading Day will be in the capable hands of Lewis Krauskopf next week and Alden Bentley the following week, while I take some time off to recharge the batteries. Back on July 13.
Another extraordinary week ended on Friday with the S&P 500 and Nasdaq hitting all-time highs as investors ramped up bets that U.S. interest rates will soon fall, a stunning turnaround from the post-’Liberation Day’ tariff gloom of early April.
Several developments this week fed into the rate cut narrative - the Iran-Israel ceasefire, tumbling oil prices, soft U.S. economic data, dovish comments from some Fed officials, and renewed pressure from President Donald Trump on the Fed to ease.
Fed Chair Jerome Powell pushed back against suggestions rates could be cut as soon as July, arguing that the impact of tariffs should be assessed first, and the consensus among the Fed’s 19 rate-setters is to hold the line too. But traders are now leaning towards three quarter-point rate cuts this year.
Progress on trade is also boosting investor sentiment. Trump said a deal between the US and China had been signed, but did not provide details, and Treasury Secretary Scott Bessent said the two countries have resolved issues surrounding shipments of rare earth minerals and magnets to the US.
That said, trade optimism was dented on Friday after Trump abruptly cut off trade talks with Canada over its new tax on U.S. technology firms, calling it a "blatant attack" and saying he will set a new tariff rate on Canadian goods next week.
The most significant market move of the week, however, was not in equities but in currencies. The dollar continued its decline, and is now down more than 10% this year. That’s its worst first-half performance of any year in more than 50 years.
It should be remembered, however, that the dollar started the year at extremely expensive levels, so some adjustment was always likely. This is proving to be a pretty severe adjustment, one which markets and policymakers appear to be relaxed about. For now.
This Week’s Key Market Moves * World stocks at record highs. The MSCI ALl Country indexrises 3% above 900 points, boosted by a resurgent Wall Street,Asia and EM, which offset sluggish Europe. The S&P 500 andNasdaq rise 3% and 4%, respectively, to new highs. * The dollar sinks to multi-year lows vs major currencies,especially European one. Dollar index down 1.5%, greenback fallsmore vs euro, sterling, Swissie. * Oil plunges after Israel-Iran ceasefire. Brent crudetumbles 12%, its biggest weekly fall since 2022. * U.S. Treasury yields slide to their lowest in nearly twomonths, curve bull steepens on growing (but still unlikely) viewthe Fed could cut rates in July. * Platinum soars above $1,400/oz for the first time since2014, and is well on track for its best month since 1986.
Chart of the Week
Self-explanatory really.
When the world’s reserve currency has its steepest January-June decline since the era of free-floating exchange rates began over half a century ago, something major is underway. How big remains to be seen. But if the Trump administration wanted a weaker currency, it can’t complain.
Here are some of the best things I read this week: 1. Who Needs the G7? 2. Can Asia and Europe Rescue the Global Economy? 3. War and Tariffs Are a Double Shock to the World Economy 4. Downgrading Uncle Sam, not America 5. The great trade rearrangement
What could move markets on Monday? * China official PMIs (July) * Japan industrial production (May, prelim) * India current account (Q1) * India industrial production (May) * Germany retail sales (May) * Germany CPI inflation (June, prelim) * UK current account (Q1) * US Chicago PMI (June) * Chicago Fed President Austan Goolsbee and Atlanta FedPresident Raphael Bostic speak (at different events)
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here.
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In 2024 alone, ProPicks AI identified 2 stocks that surged over 150%, 4 additional stocks that leaped over 30%, and 3 more that climbed over 25%. That's an impressive track record.
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8 months ago
Trading Day: Markets ’run it hot’
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
The dollar slid and stocks surged on Thursday as investors ramped up bets that U.S. interest rates will soon be cut, after President Donald Trump, in his latest attack on Fed Chair Jerome Powell, reportedly said he may name his replacement early.
In my column today I look at where the "pain trades" for investors may lie in the second half of the year. More on that below, but first, a roundup of the main market moves.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump decision on Fed not imminent, source says 2. Investors shore up defences against another Augustmarket rout 3. Wall Street forecasts windfall for big U.S. banks fromFed plan to ease leverage rule 4. BoE echoes central banks’ long bond sensitivity: MikeDolan 5. EU leaders meet to decide on whether to back quick U.S.trade deal or seek better terms
Today’s Key Market Moves * World stocks hit a fresh record peak, the S&P 500 andNasdaq both get to within a whisker of their all-time highs. * Dollar index falls to a 3-year low, the euro and sterlinghit highest since 2021, the Swiss franc hits a decade high. * Soaring FX caps stocks in Europe, where indices lag U.S.peers. In Asia, Japanese, Chinese stocks hit 5-month and 7-monthhighs, respectively. * U.S. Treasury yields fall to lowest since early May, alsopressured by weak U.S. economic data. Curve bull steepens. * Platinum rises another 4%, now up 34% this month - itsbest month in nearly 40 years and second best ever.
Markets ’run it hot’
Juice the economy. That seems to be the Trump administration’s broad plan, which will be achieved in time by tax cuts, deregulation, and loose fiscal policy. And loose monetary policy. Most definitely loose monetary policy.
Pressure from the White House on the Fed to cut interest rates is nothing new. The president has unleashed several verbal tirades towards Chair Jerome Powell for not doing so, branding him "very stupid", "very dumb" and of "low IQ".
Powell’s term as chair expires in May next year, and he insists he can’t be fired. So Trump is now considering naming his replacement early, who could operate as a "shadow" Fed chair, undermining Powell’s influence.
It remains to be seen how effective or even viable this would be. But the fact it’s being floated is pouring fuel on market moves that were already beginning to catch fire - the dollar is tumbling, Fed rate cut bets are being ramped up, stocks are flying, and "Big Tech" is getting its mojo back.
The dollar on Thursday slumped to its lowest in more than three years against a basket of major currencies - performing especially poorly against European currencies - and is on track for its worst first half of any year in over half a century.
The Trump administration will likely be quite happy with the way markets are reacting - a more export-competitive dollar, lower short-term yields, and higher stocks. And if you look further out, higher nominal growth and above-target inflation to inflate away the debt.
The danger is these moves snowball and the dollar goes into a more rapid freefall, triggering widespread market dislocation. But we’re not there yet, and investors are running with it.
Hawkish Fed could inflict markets’ biggest ’pain trades’
As the first half of the year closes, financial markets are in limbo, waiting to see how the kaleidoscope of global trade deals will – or won’t – come together after July 9, when Washington’s pause on its "reciprocal tariffs" expires. But if investors are wrong-footed, which trades will be the most vulnerable?
The state of suspended animation in today’s markets isremarkably bullish. U.S. growth forecasts are rising, S&P 500earnings growth estimates for next year are running at a punchy14%, corporate deal-making is picking up, and world stocks areat record highs.
The uncertainty immediately following President DonaldTrump’s April 2 "Liberation Day" tariffs seems a distant memory.The relief rally has ripped for nearly three months, only takinga brief pause during the 12-day war between Israel and Iran.
It’s a pretty rosy outlook, some might say too rosy. If wedo see a pullback, what will be the biggest "pain trades"?
The major pressure points are, unsurprisingly, in assetclasses and markets where positioning and sentiment are mostoverloaded in one direction. As always with crowded trades, asudden price reversal can push too many investors to the exitdoor at once, meaning not all will get out in time.
To identify the most overloaded positions, it’s useful tolook at the Bank of America’s monthly global fund managersurvey. In the June survey, the top three most-crowded tradesright now are long gold (according to 41% of those polled), long"Magnificent Seven" tech stocks (23%), and short U.S. dollar(20%).
This popularity, of course, means these three trades havebeen highly profitable.
The "Mag 7" basket of Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), Apple (NASDAQ:AAPL),Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA) shares accounted for well over halfof the S&P 500’s 58% two-year return in 2023 and 2024. TheRoundhill equal-weighted "Mag 7" ETF is up 40% this year, andthe Nasdaq 100 index, in which these seven stocks make up morethan half of the market cap, this week hit a record high.
Meanwhile, the gold price has virtually doubled in the lasttwo-and-a-half years, smashing its way to a record high $3,500an ounce in April. And the dollar is down 10% this year, ontrack for its worst first half of any year since the era offree-floating exchange rates was established more than 50 yearsago.
SLASH AND ... BURN?
In some ways, these three trades are an offshoot of onefundamental bet: the deep-rooted view that the Federal Reservewill cut U.S. interest rates quite substantially in the next 18months, a scenario that would make all these positionsmoney-spinners.
Even though the Fed’s revised economic projections last weekwere notable for their hawkish tilt, rates futures markets havebeen upping their bets on lower rates, largely due to dovishcomments from several Fed officials and a sharp fall in oilprices. Traders are now predicting 125 basis points of rate cutsby the end of next year.
Economists at Morgan Stanley are even more dovish,forecasting no change this year but 175 basis points of cutsnext year. That would take the Fed funds range down to2.5%-2.75%.
Lower borrowing costs would be especially positive forshares in companies that can expect high future growth rates,like Big Tech. Low rates are also, in theory, good for gold, anon-interest-bearing asset.
But, on the flip side, it’s difficult to construct ascenario in which the economy is chugging along, supportingequity performance, while the Fed is also slashing rates by 175bps.
Easing on that scale and at that speed would almostcertainly signal that the Fed was trying to put out a ragingeconomic fire, most likely a severe slowdown or recession. Whilerisk assets may not necessarily collapse in that environment,over-extended positions would be exposed.
Granted, this isn’t the first time investors have banked onFed cuts in the past three years, and we have yet to see a majorblow-up as a result. Markets have handled "higher-for-longer"rates much better than many observers warned, soaring to newhighs in the process.
Still, if "pain trades" do emerge in the second half of theyear, it will likely be because of one sore spot: a hawkish Fed.
What could move markets tomorrow? * Japan retail sales (May) * Japan unemployment (May) * Japan Tokyo inflation (June) * Japan Softbank (OTC:SFTBY) AGM * Euro zone sentiment indexes (June) * U.S. PCE inflation (May) * U.S. University of Michigan consumer sentiment, inflationexpectations (June, final) * Cleveland Fed President Beth Hammack and Fed Governor LisaCook participate in ’Fed Listens’ event
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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