Context
We were reminded last week that, despite its historic significance, the conflict between President Trump and Governor Cook is just one of the many complexities facing an already embattled Federal Reserve. These include notably divergent views about the economic outlook, not only among analysts but also, judging from their remarks last week, between Governor Waller and New York Fed President Williams.
The Fed also faces a persistent inflation overshoot, now in its fifth year, as reflected in last week’s core PCE of 2.9%, which could rise further in the months ahead. Adding to the challenges are the warning signals flashing in some segments of the fixed-income market.
Meanwhile, the Trump-Cook legal confrontation started making its way through the legal system, with an initial ruling postponed from Friday to Tuesday. This unfolded as another court dealt a blow to one of the legal arguments used by the Trump Administration to impose tariffs late on Friday.
As interesting as what happened last week—and a lot happened—is what did not.
Despite warnings from many circles, neither bonds nor equities sold off significantly in response to the Administration’s attempt to fire a high-level Fed official. There are several plausible explanations for this, some of which are mutually exclusive, while others are not. This includes the ability of markets to sideline concerns about “sovereign America” in favor of the resilience and exciting potential of “corporate America.”
On the data front, we received mixed indications from the UMich sentiment update (lower overall confidence and softer inflation expectations) and an upward surprise on the revised Q2 GDP growth of 3.3%.
Away from the US, India confirmed its position as one of the fastest-growing countries in the world, and the fastest large emerging economy. Its Q2 growth rate of 7.8% came in well above the consensus forecast of 6.7%. This stellar performance came just after the entry into effect of US secondary tariffs on certain exports, highlighting both the risks to sustaining India’s high growth rate and the potential cost to America of sidelining India’s fast-growing economy.
Finally, and in line with the discussion in prior notes, the 2s-30s US yield curve continued to steepen, closing the week at 130 bps. High long-end yields also attracted attention elsewhere, including in Japan and the UK.
Looking Ahead to the Week
There is a lot to watch in the next few days, starting with the initial outcome of Federal Reserve Governor Cook’s lawsuit against President Trump, with the Fed and Chair Powell also named as defendants.
There will also be interest in the Senate Committee’s consideration of Stephen Mirren’s nomination to fill the seat vacated by Adrianne Kuegler. And let’s not forget the Administration’s reaction to last Friday’s 7-4 Appeal Court finding that limits President Trump’s ability to use the 1970 IEEPA law to impose tariffs, especially as the court could “discern no clear congressional authorization.”
It’s also a busy data week with the release of the monthly jobs report, where there will be a lot of interest not just in the August numbers but also in revisions to prior months. Look also for the JOLTS data, trade, and ISM manufacturing.
We get the Federal Reserve’s Beige Book, a comprehensive bottom-up assessment of economic conditions across its districts.
Away from the US, look for Eurozone employment, inflation, and GDP data; Germany’s factory orders; Brazilian GDP; Canada’s trade and jobs numbers; China PMI, and Turkish inflation.
Those seeking insights from high-level officials serving in systemically important central banks will be directed to the ECB, where they can hear scheduled remarks from President Lagarde and Board members Cipollone and Schnabel.
Finally, as always, we will monitor corporate earnings to assess signals related to the overall economy. This week features reports from several major retailers, which could offer further insights into consumer resilience and the impact of tariffs.
