Trump vs. Powell: Market volatility amid Fed tensions and global economic shifts

Markets

US President Trump sorted the problem of a dull eco calendar yesterday. Fed Chair Powell is the thorn in the US President’s side. And while he still claims it will be unlikely to fire Powell, he doesn’t rule anything out. Earlier court rulings clearly state that you can’t fire the Fed chair over a policy dispute – Trump is a long term advocate of lower policy rates – but you can do it for cause. One route president Trump seems to be exploring is mismanaging building costs in the renovation process of the Fed’s headquarters in Washington DC. This developing story adds to the ongoing rumours of a rapid confirmation process of Powell’s successor, ie the idea of a Shadow Fed Chair. Markets remain sensitive to Trump’s attempt to undermine the US central bank’s independence (and credibility). The louder he screams to lower short term interest rates, the more he risks driving up long term interest rates. The US 30‐yr yield closed above 5% for a second consecutive session with a test of the 5.15% YtD top and the 5.18% 2023 top the likely way to go. US stock markets and the Dollar traded volatile intraday on rumours about firing Powell soon which were later than denied. The S&P 500 lost almost 1% intraday, only to close 0.32% higher. EUR/USD spiked from levels just above 1.1560 to above 1.17, before finding a closing equilibrium near 1.1640. Throughout all the fuzz, a very large majority of Fed governors are backing Powell’s stance on (stable) interest rates in light of upside inflation risks. NY Fed Williams sees tariffs adding about one percentage point to inflation through H2 2025 and into 2026 with a weaker dollar adding somewhat to price pressures. “Maintaining this modestly restrictive stance of monetary policy is therefore entirely appropriate.”

Today’s eco calendar contains US retail sales, weekly jobless claims and Philly Fed business outlook. We don’t expect a lasting market impact following the decent early July US labour market data and this week’s sticky inflation numbers. Risks around the Fed chair story are asymmetric with any steps towards ousting Powell being a potential fire starter for US asset sales. UK labour market data this morning suggest that the BoE will stick with it’s gradual and careful cutting guidance when it lowers interest rates by another 25 bps at its early August policy meeting. Sterling might get some temporary reprieve after approaching the EUR/GBP 0.87 handle a second time yesterday. We err on the side of offloading any GBP exposure in case of short‐term GBP‐rally’s.

News and views

Australian labour market data surprised negatively for the second consecutive month. Employment grew a meager 2k in June after the 1.1k contraction in May. Full time employment declined by 38.2k. This was ‘compensated’ for with a 40.2k rebound in part time employment. The unemployment rate jumped from 4.1% to 4.3% (highest since Nov 2021) as the number of unemployed people rose by 34k. Hours worked declined 0.9% in June, but following a 1.4% rise in May. The participation rate rose marginally from 67% to 67.1%. The Reserve Bank of Australia at the July 8 meeting left its policy rate unchanged at 3.85%, while the majority in the market expected a 25 bps cut. At the time, the RBA indicated that economic data were largely in line with its May forecast with inflation marginally higher. The RBA assessed the labour market as being tight. It indicated that wage growth was softening from its peak but productivity growth not picking up and growth in unit labour costs remaining high. In this uncertain context the RBA concluded that it could wait a little longer to see whether inflation returns to 2.5%. The central bank now might gradually give more weight to labour weakness. Key quarterly inflation data will be published on July 30. Markets fully discount a 25 bps cut at the August 12 meeting. The 3‐y bond yields drops 8.8 bps to 3.42%. AUD/USD is falling below the 0.65 mark (from 0.653).

The European commission yesterday proposed its new budget (Multiannual Financial Framework) for the 2028‐ 2034 period. It consists of almost €2tn, or 1.26% of the average EU gross national income between 2028 and 2034 1.13% in the previous budget). The majority of the funding comes from EU members states, but the commission also puts in place several new sources to fund the budget. Major priorities in the budget are supporting European competitiveness, prosperity and security. The budget also includes €100bn funding for Ukraine. Funding for agriculture will be reduced. Several countries already objected parts of the proposal. Yesterday’s proposal kickstarts an lengthy process of negotiations that ultimately will have to be agreed upon by EU members states (unanimously) by end 2027.

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