Trading Day: Stocks bounce back, bonds more cautious

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By Jamie McGeever
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 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 shares +3.6%, Tesla +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, AMD and Pfizer
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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)