Trump attempts to push out yet another FOMC member

European markets are being led lower by a 2% decline in the French CAC, with traders growing increasingly fearful of a fresh bout of political instability that looks likely to intensify in the weeks ahead. With French debt-to-GDP standing at roughly 115%, France holds represents one of the most highly indebted nations in Europe. With countries having exited a costly pandemic period of fiscal expansion, the elevated interest rates seen over recent years have further exacerbated the pathway higher for national debt levels. In a bit to address this issue, the French PM François Bayrou had drawn up plans to cut €44bn worth of spending per year, taking the decision to a vote of confidence on 8 September. The high likeliness of failure at that vote means markets are waking up to the potential disruption ahead, with Europe’s second-largest economy facing up to either fiscal contraction or heightened political uncertainty.

Traders are keeping a close eye on gold, US yields and the US dollar today, with Trump doing his best to further shape the Federal Reserve by removing board member Lisa Cook “effective immediately.” In a re-run of the Powell saga, the President’s ability to sack Fed members is up for debate, with Cook’s lawyer claiming that “no cause exists under the law” which allows for Trump to remove her from the role. While Trump leaned on the Federal building overspend to pressure Powell to leave, he has jumped on stories of Cook’s housing fraud as a justification to remove another Fed member. Given the recent replacement of Kugler, Trump’s attempt to replace Cook means that before long we could see three of the 12 FOMC members put in place by the President. Undoubtedly this is an attack on the independence of the Fed, bringing the widest differential between short and long-term yields (2Y-30Y) since 2022. This highlights that whilst markets perceive Trump’s moves as bringing additional rate cuts over the near-term, it also brings increased economic instability concerns as the Fed base monetary policy decisions on the desires of the President rather than economic theory.

Trump has once again thrown around tariff threats in a bid to achieve fresh goals, warning China of 200% tariffs unless they supply sufficient rare earth magnets to US businesses. Those materials have been central to negotiations, with the President’s extending negotiations by 90-days and overlooking Chinese purchases of Russian crude in a bid to keep their relationship stable. However, in the event that those rare earth exports start to dry-up, there was always a risk that Trump would dial up the threats as we have now started to see. Meanwhile, we have also seen Trump warn of a spike in tariffs for those nations implementing digital sales taxes (DST) on US tech firms, raising risks for European nations in particular. This will come as a blow to the UK, which now faces up to a rise in the 10% tariff rate unless they give up on a tax that currently brings in roughly £800 million per year for a treasury that is already strapped for cash ahead of the Autumn budget.