Trump attacks Powell, as yields rise, but US stocks rise to fresh record

President Trump has re-started his public humiliation of the chairman of the Federal Reserve, Jerome Powell. Earlier on Tuesday, he demanded that ‘too late’ Powell lower the US interest rate now. As usual, when a head of state demands that borrowing costs are reduced it tends to have the opposite effect, and US Treasury yields are rising on the back of Trump’s comments.

UK yields march higher, as labour market data erodes hopes of rate cuts

US Treasury yields are rising at a slower pace than European yields, which are surging on Tuesday. The UK 10-year yield is higher by 6bps, and European yields are higher by a similar amount. The spike in European bond yields coincided with the release of the UK labour market data, which showed stubbornly high wage data and a slowdown in job losses in recent weeks and months. As we move through Tuesday, interest rate cut expectations for the UK are being scaled back, there is now less than 1 rate cut getting priced in by the end of the year, and only a 40% chance of a cut priced in for November.

US political risk premium rises

The President’s outburst at the Fed chair, could keep US interest rates elevated, at least in the near term, as it raises the risk of official policy interference. Added to this, since the President has failed in actually firing Jerome Powell, he is now considering suing him because of the ‘horrible and grossly incompetent job’ he is accused of doing while managing building works at the Federal Reserve. Powell is in Trump’s cross hairs, and he is unlikely to come away unscathed unless he cuts rates sharply.  

Tariff inflation fails to materialize in July

The US CPI data was a mixed bag, but for those looking for a big surge in tariff-related inflation, they were sorely disappointed. The headline rate of price growth remained at 2.7%, while the core rate jumped from 2.9% to 3.1%, driven by increases in shelter costs, airfares and medical costs, which are unrelated to tariffs.

This has boosted expectations for Fed rate cuts, the chance of a rate cut in September is now at 96%, according to the Fed Fund Futures market. However, in the strange world that we live in, higher expectations of rate cuts are only having a mildly moderating impact on Treasury yields, which are rising due to a political risk premium being priced in by investors.

Nasdaq makes record high

For now, UK bonds are taking the brunt of the selling, and Gilt yields are rising faster than yields in Europe and the US. Due to the UK’s weak fiscal position, this is to be expected. The increase in global bond yields is only having a mild impact on stocks. European indices are mildly lower, although tech stocks and real estate stocks are the weakest performers on Tuesday, as both sectors are impacted by rising bond yields.

US stocks are managing to extend gains, and the Nasdaq has made another intra day record high this afternoon. This comes even though Nvidia and AMD are continuing to register losses due to the ongoing fall out of the deal they have cut with the White House to give 15% of all profits from sales of H20 chips into China.

Ahead today, all focus will be on the bond market to see if yields continue to rise, and if this starts to drain sentiment from the stock market. For now, US stocks are resilient in the face of rising yields.