Trial balloon or trap door? Markets game out a Powell exit

Wednesday gave markets a taste of theatre, a kind of policy dress rehearsal where Powell was presumed to be headed for the exit stage left—dragged not by poor performance but by the whims of a showrunner president with a flair for spectacle. Traders didn’t quite buy the whole ticket, but they stayed for the opening act, and the resulting market choreography offered a useful stress test.

When the rumour mill began spinning—Trump firing Powell—the screens lit up like a fire alarm in the Eccles Building. Short-end yields took an immediate header, the dollar wobbled like a drunk trying to pass a field sobriety test, and equities flirted with panic before stabilizing. It was a classic "Powell’s out, rate cuts in" knee-jerk reaction, despite the low probability of the event ever materializing. But as any seasoned desk trader knows, sometimes it’s not the truth that moves markets—it’s the possibility.

Here's how it all unfolded:

1. Front-end Treasuries caught a bid like someone just yelled "free money" at the T-bill window.
2. The dollar slipped as if someone had greased the floor with dovish oil.
3. Equities stumbled, not because Powell is beloved, but because uncertainty is toxic to risk appetite.
4. Credit spreads widened, sniffing out political interference risk.
5. Long-end yields crept up, sensing either bigger deficits or a weaker inflation-fighting Fed.

If this was the appetizer, the full-course "Powell-firing" scenario would be a messy banquet. Sure, markets might initially front-run aggressive cuts from a politically captive Fed, tempting risk assets with the sweet taste of easy money. But the hangover would be brutal. Central bank credibility isn't priced until it's tested—and if the Fed starts looking like a puppet show, that premium widens fast.

Meanwhile, away from the policy soap opera, the June PPI came in flat. Zero. Nada. A goose egg. If Powell had been watching, he might've cracked a smile behind the curtain. Producer prices clocked in at 0.0% month-on-month, and 2.3% year-on-year—hardly the stuff of inflation panic. The PPI read adds a dovish accent to an otherwise cautious macro backdrop, and Treasuries, ever the sensitive types, were quick to exhale.

Dig a little deeper, and the details were mixed. Airline fares nosedived in the PPI (-2.7%), in contrast to the CPI's milder descent. That’s a tailwind for the Fed’s preferred inflation compass—the core PCE deflator—which now looks poised to register a palatable 0.2% MoM. Healthcare costs edged down, portfolio fees spiked, and the net result leaves inflation watchers bracing for the real test: July through September, when tariff pass-through and base effects start flexing.

Yields cooled off post-PPI, with the 10-year drifting back toward 4.45% and real yields finding comfort near 2%. But curve steepening remains the dog that hasn’t barked. The 2s10s stayed locked in their slow dance, barely shifting. This, despite issuance risks that remain about as subtle as a freight train. With half a trillion dollars in net Treasury issuance queued up, mostly via bills, it's only a matter of time before the long end demands compensation for the deluge.

And yes, tariffs may plump up tax receipts temporarily, but don’t let that fool you. It’s like trying to patch a leaking boat with dollar bills. The deeper fiscal tide—the one powered by persistent deficits and mounting interest costs—is still rising.

In sum:

Markets just got a trial balloon of what it might look like if Powell were shown the door—and they didn’t love it. Inflation looks tame for now, but the storm season is coming. And while the front end flirts with relief, the long end is staring down a fiscal cliff with binoculars. One eye on Powell, one eye on issuance, both hands on the sell button.