As the financial landscape shifts ahead of critical economic reports, speculation mounts over potential changes in the Federal Reserve’s leadership. President Donald Trump continues to weigh his replacement of Jerome Powell as Fed Chair. Among all the candidates, Christopher Waller easily stands out as a clear front runner in this intense competition. With White House Chief of Staff, Trump is likely to announce his decision of Powell’s replacement by September or October. This developing situation further complicates an already stressed economic climate, which has been burdened by an ongoing trade war and related currency fluctuations.
In the last week, we have seen that President Trump has delayed these tariffs by 90 days. In the meantime, he clearly hopes to negotiate deals with key trading partners. This decision is another example of this administration’s robust efforts to enforce fair trade relations. They have made a tentative accord with China that runs until mid-August. The consequences of these negotiations are felt around the world, impacting markets and investor sentiment and economic predictions everywhere.
Federal Reserve Under Fire
In his most recent tirade, President Trump cranked up the pressure on Fed Chair Jerome Powell to cut interest rates now. Public pressure leads to panic about the central bank’s independence. Further, it raises serious concerns about whether the bank can respect political independence in its operations. The political firestorm that has characterized the recent debate around interest rate hikes can significantly affect our national economy.
Based on recent economic indicators, I think the Federal Reserve is in a position to—dare I say it—act soon. The market has now completely priced out the first interest rate cut to September. At the same time, the odds of a July rate cut are up to 25%. This increased sensitivity is a sign of concerns regarding underlying economic growth and inflation.
Through all of these pressures—and they were considerable—federal Reserve officials, not least among them Powell, have held their collective powder, intent on making data-driven, dispassionate decisions. European Central Bank President Christine Lagarde has insisted on their commitment to “steer through the fog of uncertainty.” She explained that the current interest rate levels are adequate to address any possible risk.
Economic Data on the Horizon
Even as the markets look for more guidance on the course of monetary policy, there are a number of important economic reports coming due this week. On Tuesday, alternative JOLTs job openings data for May will provide more useful perspective on labor market dynamics. Then on Wednesday, we get to see the ADP private employment report for June. These reports are immensely important as they provide the most accurate window into hiring trends and future economic development.
Further, international data will continue to be an important driver of market expectations. Switzerland’s Consumer Price Index (CPI) data for June could attract particular attention, providing insights into inflationary pressures within the region. China will be putting out their official June manufacturing and non-manufacturing PMIs. This treasure trove of data will be invaluable in figuring out just how healthy the world’s second-largest economy really is.
Japan’s Tankan survey for Q1 will be closely watched, as it’s a key gauge of business conditions at large Japanese manufacturers. This survey will be vital in gauging corporate sentiment and capital expenditure intentions in Japan. It will play a key role in the bigger narrative of new global economic stability.
Currency Markets React
In reaction to these developments, the US dollar is the week’s worst performing major currency against all peers. The dollar’s slide highlights market jitters over upcoming US economic data, particularly the impact a strong report might have on Fed policy. Investors are especially focused on the impact President Trump’s trade and Fed manipulation could have on currency valuations.
As we head toward an uncertain 2020, the interaction between US monetary policy and US trade relations continues to be a key concern for market participants. Traders are hard at work trying to price in probabilities of cuts and when they should happen. Consequently, currency markets will almost surely remain on edge and volatile.