Are financial markets starting to worry about Trump?

Outlook

We get the US Q2 GDP revision, pending home sales (July), the usual weekly jobless claims, and the Kansas City Fed business survey. Probably the most important will be a speech by dove Waller, one of the top Trump choices to replace Powell. He speaks after the close but we know he will be taking a pulpit out for trial run. 

Reuters points out Fed fund futures are showing the probability of a Sept rate cut rising to 87.2% from 75% a week ago. It also reports the 2-year Treasury at a 4-monthe low of 3.61% and “two-year inflation-linked swaps closed in on 3% for the first time in three months.”

Financial markets, which normally prefer to pretend politics do not matter, are starting to be alarmed by Trump—interfering with Nvidia’s Chinese business, taking a management role in Intel, bullying the Fed. This is a good thing, because if anything can make Trump back down, it’s a falling stock market.

Tariffs fade a bit in the context of the corporate outrages. Trump’s plan to grab 15% of Nvidia’s Chinese earnings as a “commission” is appalling. It’s not yet clear how it would work and needs to be put into law first, anyway, but Nvidia is in talks with the government about it. This is more mob-boss extortion and Wall Street doesn’t like it one bit. The WSJ even has a front-page article on the top lawyer to fend off Trump.

Forecast

The dollar is down across the board, led by the Chinese yuan, fixed at the lowest this year. The Brazilian real is near a one-year high, 50% tariff be damned. The Mexican peso is also near a record high. The dollar is firmer even against the euro, beset by French political/fiscal troubles. That has meaning. Silver is nearly back to the July high, a 14-year record, on the rate cut outlook.

It's fascinating that Trading Economics newstream reports outcomes from all over the world in the first sentence and then proceeds straight to the US rate cut as the driver.

Today’s unemployment data will get mined for signs that Mr. Powell is right to worry, and that is a thorn in the dollar’s side. Tomorrow’s PCE is thought to be relatively tame and that leaves us with the actual payrolls next week. (Note that the week after that, the BLS performs its annual revision, sure to raise eyebrows as to interference from the White House).

We can’t find anything in the current conditions to support the dollar, except maybe GDP (expected up a whisker to 3.1%), but that’s rearview mirror. Yields “should” rise on higher inflation premia (plus something for Trumpian uncertainty) but are not, indicating the threat of stagflation/recession is stronger.

We can’t hope to recover losses from the false dollar push, but we can hope to make a dent.

Food for thought: If equities are still on the soft side despite Nvidia earnings actually okay and the consensus is in for a rate cut, does that mean Trump’s Fed war and all his other uncivilized behavior is starting to arouse rebellion? Alas, no. According to Nobel economist Krugman:

So why aren’t markets freaking out? Nations in which central banks lose their Independence sooner or later suffer high inflation, especially when they are taken over by autocrats who buy into crackpot economic doctrines. And Trump, who has been demanding large rate cuts because, he claims, the economy is running hot — which almost every economist would say is a reason to raise rates, not cut them — certainly fits that pattern. Yet although there have been small tremors in the bond and currency markets, there have been no significant upheavals in financial markets that reflect the severity of the situation we are in. Throughout this episode, the stock market has remained fairly flat and bond yields haven’t spiked.       

Why not? Do financial markets doubt that Trump will get his way? Or do they reject mainstream economics and the clear examples of countries like Turkey and Argentina?

Neither. My read of economic and financial history is that market pricing almost never takes into account the possibility of huge, disruptive events, even when the strong possibility of such events should be obvious. The usual pattern, instead, is one of market complacency until the last possible moment. That is, markets act as if everything is normal until it’s blindingly obvious that it isn’t.

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