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Reuters
9 hours ago
- Business
- Reuters
Have we seen Powell's last rate cut as Fed chair?
ORLANDO, Florida, July 31 (Reuters) - Federal Reserve Chair Jerome Powell made it clear on Wednesday that the resilient U.S. labor market is currently the primary determinant of monetary policy, a signal that strong July employment figures could snuff out all bets for a September rate cut and reduce the likelihood of any further easing this year. At his press conference following the Federal Open Market Committee's meeting on Wednesday, Powell insisted that the rate-setting body's next move will depend on the "totality" of incoming economic data. He acknowledged the case for easing, like the softening in consumer spending, GDP growth of only 1.2% in the first half of the year, and downside risks to the job market from weakening labor demand and supply. But he signaled why the Fed is maintaining its mildly restrictive stance: "The main number you have to look at right now is the unemployment rate," Powell told reporters. This firm position is particularly notable given that Governors Christopher Waller and Michelle Bowman voted to ease, the first time in over 30 years that there have been two dissenters at a Fed policy meeting. But Powell has a point. The labor market is still broadly in balance, thanks to tighter immigration controls capping the inflow of foreigners into the workforce. Other indicators like job quits and openings rates are holding up well too. Plus, an unemployment rate of only 4.1% is hardly justification for a rate cut. The initial market reaction – a retreat on Wall Street, rise in bond yields, surge in the dollar and further cooling of rate cut bets in money markets – suggests investors heard Powell's message loud and clear. Rates futures markets now indicate that the probability of a quarter-point cut in September is essentially a coin toss, the least dovish pricing in over a year. Only one rate cut by the end of this year is fully priced. Steven Englander, head of global G10 FX research at Standard Chartered, says it's difficult to argue with the market's interpretation based on Powell's tone. "Powell is pretty clear that he's tying himself to the unemployment rate," Englander notes. The labor market's resilience shows why financial markets have once again overestimated the Fed's appetite for easing. The unemployment rate has been anchored at 4.0-4.2% for over a year. That's historically low, and as Powell says, essentially shows the economy is running at full employment. As long as that remains the case it will be difficult to justify cutting rates, even if that balance is increasingly precarious due to the "dual slowing" of labor supply and demand, as RBC's Mike Reid puts it. And we mustn't ignore inflation, which also arguably warrants Powell's "modestly" restrictive policy stance. Annual inflation is running "somewhat" above the Fed's 2% target, according to Powell, with core CPI at 2.9% and core PCE at 2.8%. And with the pass through from tariffs yet to be fully felt, the risks to prices are skewed to the upside. Powell reckons that tariffs should represent a one-off price rise only, but he admits no one can be sure. If the nascent tariff-fueled creep in goods prices persists, the Fed may feel it has to wait to ease policy until the impact subsides. And that probably won't be until next year. At the height of the post-Liberation Day turmoil in early April, traders were pricing in more than 130 basis points of easing this year. And just one month ago, they were expecting around 70 bps of cuts by year end, but that's now down to around 35 bps. Looking further out, only 65 bps of easing is priced into the futures curve by May of next year when Powell's term as Fed Chair ends. Could Powell have presided over his last rate cut as Fed Chair? That's unlikely, but certainly not impossible. (The opinions expressed here are those of the author, a columnist for Reuters)
Reuters
16-07-2025
- Business
- Reuters
Trading Day: Bond blues mar stocks' joy
ORLANDO, Florida, July 15 (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist The S&P 500 and Nasdaq leaped to new highs on Tuesday thanks to a surge in Nvidia shares, but closed mixed as investors digested a pick-up in U.S. inflation, a raft of major U.S. financial firms' earnings and spiking bond yields around the world, especially in Japan. More on that below, but in my column today I ask whether there is a sense of tariff complacency creeping into markets, as investors increasingly bet on the 'TACO' trade. 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. Today's Key Market Moves Bond blues mar stocks' joy It was a mixed bag on world markets on Tuesday. Two of Wall Street's three main indices, Britain's FTSE 100 and the MSCI World index hit fresh peaks, yet U.S. inflation rose, bond yields marched higher and investors gave a thumbs down to seemingly solid earnings from U.S. financial firms. Equity market strength was mostly in tech, after AI darling and chipmaker Nvidia said overnight it plans to resume sales of its H20 AI chips to China. Hong Kong's tech index got the ball rolling with a 2.8% rise, and tech was the only sector on the S&P 500 to close in the green. But if the market's glass was half full at the start of the day, it was half empty by the end of it. U.S. inflation was broadly in line with expectations, yet investors focused on the upside risks; U.S. bank earnings were solid, but financials were among the biggest decliners. The shadow of higher bond yields is beginning to lengthen as worries over governments' fiscal health, tariff-driven inflation and investor appetite for fixed income assets pick up again. The 30-year U.S. Treasury yield is back above 5.00%, but the eye of the bond market hurricane appears to be in Japan. Investor angst around an Upper House election on Sunday is bubbling up. Prime Minister Shigeru Ishiba's sliding popularity suggests even his modest goal of retaining a majority is out of reach, and defeat could bring anything from a shift in the makeup of Ishiba's coalition to his resignation. Japanese government bond yields are surging, but that's proving to be a headwind for the yen rather than a tailwind as extra pressure on the country's already strained public finances, a straight-jacketed Bank of Japan and stagflation fears more than offset any potential carry for yen investors. The yen slumped to a three-month low on Tuesday, back within sight of the 150 per dollar mark. The raft of economic indicators from China overnight, meanwhile, generally showed activity in June held up better than economists expected, and second quarter GDP growth was slightly stronger than forecasts too. But Beijing is still under pressure to inject more stimulus into the economy. The property bubble continues to deflate, with new home prices falling at their fastest pace in eight months, and more broadly, China's economic surprises index is its lowest in three months. If incoming data is beating forecasts, it is because expectations have been lowered so much. Tariff 'doom loop' hangs over global equities The astonishing rebound in stocks since early April largely reflects investors' bet that U.S. President Donald Trump won't follow through on his tariff threats. But the market's very resilience may encourage the president to push forward, which could be bad news for equities in both the U.S. and Europe. Investors appear to believe that the April 2 "reciprocal" tariffs were mostly a tactic to bring countries to the negotiating table, and Washington's levies will end up being much lower than advertised. Tariffs may end up much higher than they were before Trump's second term began, but the situation will still be better than the worst-case scenarios initially priced in after Trump's so-called "Liberation Day". Monday's equity moves were a case in point. Trump's threat on Saturday to impose 30% levies on imports from the European Union and Mexico - two of America's largest trading partners - was met with a collective market shrug. European and Mexican stocks dipped a bit, but Wall Street closed in the green and the Nasdaq hit a new high. This follows threats in recent days to place a 50% tariff rate on goods imported from Brazil and a 35% levy on goods from Canada not covered under the USMCA agreement. Brazilian stocks have slipped 5%, but Canadian stocks have hit new peaks. The question now is whether the line between complacency and the "TACO" trade - the bet that "Trump always chickens out" - is getting blurred. The scale of the recovery since April 7 is truly eye-popping. It took the S&P 500 less than three months to move from the April bear market lows to a new all-time high, as Charlie Bilello, chief market strategist at Creative Planning, recently noted on X. This was the second-fastest recovery in the last 75 years, only bested by the bear market recovery in 1982 that took less than two months. On a 12-month forward earnings basis, the S&P 500 index is now near its highest level in years and well above its long-term average. The tech sector, which has propelled the rally, has rarely been more expensive in the last quarter century either. None of that means further gains cannot materialize, and one could argue that the valuations are justified if AI truly delivers the promised world-changing productivity gains. Regardless, it is hard to argue that the rally since April is not rooted in the belief that tariffs will be significantly lower than the levels announced on Liberation Day. If many countries' levies do end up around 10% like Britain's and the aggregate rate settles around 15%, then equity pricing might very well be reasonable. But if that's not the case, growth forecasts will likely have to be revised a lot lower. "We stay overweight U.S. stocks, but don't rule out more sharp near-term market moves. Uncertainty on who will bear tariff costs means yet more dispersion in returns – and more opportunity to earn alpha, or above-benchmark returns," BlackRock Investment Institute analysts wrote on Monday. One concern is that a loop is potentially being created, whereby Wall Street's resilience and strength in the face of heightened trade uncertainty actually emboldens Trump to double down on tariffs. Most analysts still believe cooler heads will prevail, however. Trump's tolerance for equity and bond market stress, and therefore U.S. economic pain, appears "limited", according to Barclays. But if markets have gotten too complacent and Trump does increase tariffs on EU goods to 30%, potential retaliation would risk a repeat of something similar to the post-Liberation Day selloff, sending European equities down by double digits, Barclays warns. It may also be that when it comes to tariffs, investors are focusing so intently on China that not much else moves the dial. This may be short-sighted though. China accounted for 13.4% of U.S. goods imports last year, the lowest in 20 years. In contrast, the U.S. imported $605.7 billion of goods from the European Union, or 18.6% of all imports and the most from any single jurisdiction. As Trump sees it, Europe is "ripping off" America almost as much as China. Bilateral U.S.-China trade last year totaled $582 billion, compared with bilateral U.S.-EU trade flows of $975 billion, U.S. Census data shows. America's $235.9 billion goods deficit with the EU was smaller than its $295.5 billion gaps with China, but that's still comfortably America's second-biggest trade deficit. What could move markets tomorrow? Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.
Reuters
11-03-2025
- Business
- Reuters
Trading Day: Another sea of red as tariffs trump ceasefire hopes
ORLANDO, Florida, March 11 (Reuters) - TRADING DAY Making sense of the forces driving global markets Ukraine said on Tuesday it is willing to accept a U.S. proposal for a 30-day ceasefire, a deal that Washington will now put to Moscow. Investors initially cheered the news, and at one point the Nasdaq was up more than 1%. But Trump's announcement that he will double tariffs on imported steel and aluminum products from Canada to 50% weighed heavily, and traders ended the day with a sea of red across their screens. Today's Key Market Moves. The three main indexes on Wall Street close at fresh five-month lows. The S&P 500 is back in 'correction' territory, down more than 10% from its peak, and the Nasdaq is off 15% from its peak. The dollar slides to a 5-month low against a basket of major currencies, failing to draw any support from the rebound in Treasury yields. The biggest driver of that move is the euro, which smashed through $1.09 for the first time since October. $1.10 is now well within view. Bitcoin hits a fresh four-month low but ends the day 5% higher, snapping a five-day losing streak, as general risk appetite recovers in U.S. afternoon trading. Britain pays a record-high yield on inflation-linked bonds sold via syndication. While U.S. borrowing costs may be easing, they're rising in many parts of the developed world, especially Europe. The prospect of a Russia-Ukraine ceasefire is a ray of hope for investors, but not enough to lift the darkening economic clouds that are gathering. The brewing global trade war is creating record levels of uncertainty, by some measures, and businesses and consumers alike remain extremely nervous. Despite the market turmoil and alarming level of uncertainty his tariff agenda has created, Trump is showing no sign of backing down, and on Tuesday he cranked the trade war up a gear. Around $5 trillion has been wiped off the value of U.S. stocks since the S&P 500 peaked a month ago, the dollar is sliding, and volatility and corporate bond spreads are breaking higher to levels not seen in months. Trump dismisses this as part of the necessary "transition" to a new, rebalanced U.S. economy. But it's taking its toll in financial market pricing, as well spending, investment and sentiment across the country. One consequence of the tariffs chaos is the quandary it could put the Federal Reserve in. Rate cut expectations are picking up again due to the deteriorating growth outlook and possible recession fears. But economists are also raising their inflation forecasts, and a hotter-than-expected CPI report on Wednesday would be particularly unwelcome for policymakers. While implied volatility in U.S. Treasuries is rising, there is no sign yet of any market dysfunction. But in such a tense environment, the recent steep decline in open interest in the Treasury futures market will be worth keeping an eye on. Exposure to Treasury futures plunges at risky moment Levels of open interest in the U.S. Treasuries futures market rarely garner much attention, but this might be one of those occasions, as President Donald Trump's tariff agenda threatens to slam the brakes on the U.S. economy, perhaps even putting it into reverse gear. Commodity Futures Trading Commission figures show that open interest, the broadest measure of investors' exposure to U.S. bond futures, is sliding at a historic pace. In some cases, such as two-year contracts, the fall is the sharpest on record. In the week through March 4, open interest in two-year futures fell by a record 396,525 contracts, or nearly $80 billion. That's around 10% of investors' total exposure, and it means overall open interest is down 17% from its peak around the U.S. presidential election in November. Open interest in the 10-year space fell by 503,744 contracts, or $50 billion, the third biggest weekly fall on record and again around 10% of total exposure. The value of open interest across two-, five- and 10-year contracts fell by $179 billion in the week to $1.858 trillion, the lowest since June last year. More significantly, this marked a notable 9% decline in a single week. Why does this matter? As a paper, opens new tab by Federal Reserve staffers Andrew Meldrum and Oleg Sokolinskiy found last month, cash market depth "significantly affects liquidity fragility in all maturity sectors" of the Treasury market. In other words, the slump in open interest could mean that one of the world's most important markets has become easier to disrupt. 'POINT OF CONCERN' Some of this activity is seasonal, as funds are rolling their positions into new benchmark contracts. And some is related to the so-called basis trade, the arbitrage play used by hedge funds to exploit the tiny price difference between cash bonds and futures. So far, so normal, in which case open interest should pick up again in the coming weeks as investors of all stripes - particularly asset managers on the 'long' side and hedge funds on the 'short' side - rebuild their exposures. But the sharp moves are coming at a time of heightened volatility and uncertainty across all markets. Wall Street and U.S. Big Tech have borne much of the brunt, with around $5 trillion wiped off the value of U.S. stocks in the last three weeks. But volatility is on the rise everywhere. Treasury yields have tumbled around 60 basis points in the last month, and implied volatility as measured by the MOVE index this week rose to its highest in four months. True, there has been no sign of market dysfunction despite the big price moves, but room for complacency is shrinking. "Uncertainty could keep some investors away," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "If open interest doesn't come back it could be a sign that risk managers are deleveraging. Right now it's something to watch closely rather than a point of concern." RECORD FALLS Much of the decline in recent months is down to leveraged funds reducing their 'short' positions more aggressively than asset managers scaling back their corresponding 'long' positions, suggesting speculators are deleveraging. The value of leveraged funds' aggregate short position across two-, five- and 10-year contracts is now $970 billion. That's down by almost a fifth from the record high of $1.186 trillion in November last year. This is probably not a bad thing and will likely please regulators who had warned that a disorderly unwind of funds' basis trades could pose major financial stability risks. That hasn't played out. But further reduced open interest from here at a time of rising volatility might put liquidity, prices and investors' ability to trade under greater strain. As Meldrum and Sokolinskiy note, "Times of low market depth are associated with an increased probability of low liquidity states in the future." And at this delicate juncture, anything that impacts liquidity in the world's most important market is certainly worth monitoring. What could move markets tomorrow? Japan wholesale inflation (February) India CPI inflation (February) U.S. 10-year Treasury note auction Bank of Canada interest rate decision U.S. CPI inflation (February) If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today. I'd love to hear from you, so please reach out to me with comments at opens new tab. You can also follow me at [@ReutersJamie and @ Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, 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. here. By Jamie McGeever; Editing by Bill Berkrot
