There was a bit of intraday volatility when government officials suggested President Trump had expressed support for the idea of firing Trump at a discussion with Republican lawmakers. This saw weaker equities, lower Treasury yields and a weaker USD. However, less than an hour after the media had caught onto this story, Trump said he was not planning on doing anything, “I don’t rule out anything, but I think it’s highly unlikely. Unless he has to leave for fraud.” Trump said he had spoken to lawmakers about the concept of firing him and asked what they thought, “Almost all of them said I should. But I’m more conservative than they are”. Markets subsequently reversed course.
On tariffs, Trump said he would send letters to more than 150 countries notifying them of new tariff rates, “it’s all going to be the same for that group”, a group of smaller countries with which the US doesn’t do much business.
Bloomberg reported that Trump has softened his tone with China in an effort to secure a summit with President Xi and a trade deal, noting the warming posture contrasts with his threats against other trading partners regarding tariffs. Sources said that in meetings with staff, Trump is often the least hawkish voice in the room, regarding discussions about China. This story fits with the recent relaxation of export controls that will allow Nvidia to sell its less-advanced H20 AI chip to China. Furthemore, a source noted plans to extend the trade war truce with China for another three months, beyond the current 12 August deadline when tariffs on China are due to return to 145%.
In economic data, US PPI inflation figures were weaker than market expectations, with the core figure flat and the annual increase slipping to 2.6% y/y. As the CPI data showed, higher tariffs are feeding into higher goods price inflation. But for the PPI, a chunky fall in travel-related services was an offsetting factor. The release of the CPI and PPI reports has led analysts to estimate that the core PCE deflator, due 1-August, will probably rise 0.3% m/m, leaving the annual increase at 2.7%, with further upside later this year as higher tariffs continue to pass through.
The softer PPI data came as some relief to the market, seeing a reversal of yesterday’s upward move in rates, although mainly at the short end, with the Treasuries curve notably steeper. The 2-year rate is currently down 6bps to 3.88%, the 10-year rate is down 3bps to 4.45%, while the 30-year rate is barely lower, at 5.01%.
The Fed’s Beige Book survey showed US economic activity increased slightly between late May and early July. The report also noted all 12 regions of the country reported price increases, with businesses experiencing modest to pronounced input cost pressures related to tariffs. Many firms passed on at least a portion of cost increases to consumers through price hikes or surcharges, although some held off raising prices because of customers’ growing price sensitivity, resulting in compressed profit margins.
UK CPI inflation data were two-tenths stronger than consensus across the board with annual headline and core inflation rising to 3.6% and 3.7% respectively, and the services CPI remaining steady at 4.7%. The data didn’t have much impact on expectations for BoE easing this year, with an August rate cut still highly priced as well as a follow-up move in November, with expectations that inflation will fall later this year. But UK gilt yields are slightly higher on a day in which European and US rates are lower. There was no sustained reaction in GBP.
Net currency movements for the day against the USD have been small. JPY has been the biggest mover, bouncing back after yesterday’s underperformance. USD/JPY is back below 148 and NZD/JPY is back below 88. The volatility around speculation of Fed Chair Powell’s future saw whippy trading in the NZD. The currency was already on the back foot, trading below 0.5915 overnight and bounced up to 0.5970, before settling close to 0.5940, back to where it was this time yesterday.
Apart from the notable fall in NZD/JPY, other NZD cross movements have been modest, although all to the downside. Of note, NZD/EUR slipped below 0.51 overnight and currently sits just above the figure. NZD/AUD took a peek below 0.91 and currently sits just above the figure. NZ rates showed little net movement yesterday, against a backdrop of higher global rates, resulting in some cross market outperformance, which would explain the slightly softer NZD performance.
US equities are up modestly, bouncing back strongly after the S&P500 was down as much as 0.7% at its low, during the kerfuffle around speculation of Trump firing Powell. The Euro Stoxx 600 index closed down 0.6%.
On the calendar today, monthly NZ inflation figures will help firm up our Q2 CPI estimate, which currently sits at a chunky 0.8% q/q, adding to the trend of higher inflation pressure. Australia’s employment report is released this afternoon. Tonight sees the release of UK labour market data and US retail sales.
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