Debate on central bank independence adds new uncertainty for US markets
Markets
After the market chaos in the wake of the Liberation Day reciprocal tariffs announcement, president Trump and his administration now apparently (again) started a new battlefield challenging classic economic thinking/wisdom: central bank independence. Referring to the ECB rate cuts, president Trump on Thursday already indicated that Jerome Powell and the Fed are again too late and wrong not to have already cut interest rates. He reinforced that call on Monday morning as Trump assessed that there is virtually no inflation anymore in the US. At the same time, there are all kinds of rumours/headlines (including from Kevin Hassett, director of the National Economic Council) that the administration continues studying the matter of the President being able to dismiss the Fed Chair. This intensifying debate on central bank independence yesterday added a new layer of uncertainty for US markets. The US Treasury curve again steepened, with the 2‐y ceding 3.6 bps. Markets apparently assume that the Fed at some point will (have to) give in to political pressure even as Fed Chair Powell last week indicated that, considering current status of the economy/labour market, the Fed still is well positioned to maintain its current wait‐and‐see stance, giving priority to price stability. However, the sell US trade again hit the long end of the US yield curve hard with the 30‐y yield adding 10.4 bps. At 4.90%, the psychological barrier of 5.00% (often seen as a line in the sand for outright market panic) is again within reach. European (equity) markets still were closed for the Easter Long Week, but US equities again were hit hard as the cornerstone of Fed independence was seen as coming further under pressure. US equity indices declined about 2.5%. The dollar also was again in free‐fall. DXY dropped below the 99.57/98.98 key support area, trading at the lowest level since end March 2022. Similar narrative for EUR/USD with the pair breaking beyond the 1.1495 February 2022 top. USD/JPY this morning is testing the 140 barrier!
This morning, Asia markets showed no clear trend after the US sell‐off yesterday. European markets reopen after the long Easter weekend. A balanced ECB communication at Thursday’s policy meeting and Bunds recently profiting from safe have flows, potentially keep European bond markets well supported short‐term. The eco calendar is thin today, but several Fed and ECB speakers will give their view. The US Treasury will sell $69 bln of 2‐y notes, but the focus of markets evidently is at the long and of the curve. Yesterday’s breaks in several key USD cross rates including EUR/USD suggest a further slide of the US currency. The 30‐y US yield nearing the 5.0% barrier only might add to further US(D) related nervousness.
News and views
China’s Ministry of Commerce yesterday published a statement warning countries against (trade) deals with the US at the expense of China’s interests. In such scenario, Beijing ““will never accept it and will resolutely take reciprocal countermeasures. China is willing to strengthen solidarity and coordination with all parties, jointly respond and resist unilateral bullying acts.” Part of the US government’s tactics to get rid of currently paused additional tariffs include pushing other countries to curb trade with China. Sources suggest this could include imposing secondary tariffs on countries with close China ties. The US also wants them to stop absorbing excess goods from China that are being rerouted in order to escape the very high US duties. Reuters reported earlier this month that Vietnam for example is prepared to crack down on Chinese goods being shipped to the US via its territory and to tighten controls on sensitive exports to China.
Rating agency S&P raised the Greek credit rating to BBB with a stable outlook. They praised efforts to improve tax compliance, combined with resilient economic growth, which are enabling Greece to continue overperforming fiscal targets. The net debt to GDP ratio is expected to fall by an average of 6 percentage points over the next four years (to 114% in 2028). Finally, the country’s debt management agency has a significant cash position estimated at 15% of GDP which covers close to three years of upcoming debt maturities.
Author
KBC Market Research Desk
KBC Bank
