Following President Trump’s “firing” of Fed Governor Cook, US Treasury yields are lower and the curve is steeper, while the USD shows a modest broadly-based fall. US equity investors saw the dip in futures as a buying opportunity and the S&P500 shows a small gain.
Yesterday afternoon, President Trump fired Fed Governor Cook based on allegations that she had “made false statement on one or more mortgage agreements”. Trump has legal grounds to fire a Fed Governor “for cause by the president”, which has been taken to mean for serious misconduct, although the decision will be contested in court. Cook said she won’t resign and deems the president’s action as illegal and will be filing a lawsuit challenging the decision.
The prevailing view is that this was another attempt by Trump to undermine the independence of the Federal Reserve, alongside recent public attacks and threats on Chair Powell. Firing Cook gives Trump another opportunity to nominate someone friendly to his policy agenda of lower rates.
The prospect of more FOMC members sympathetic to a lower rates environment drove down short-dated US Treasury yields, with the 2-year rate down 4bps to 3.68%. Despite falling rates, the auction of $69b of 2-year notes was well supported. Political interference in monetary policy has weighed on sentiment for the longer end of the curve, with the 30-year rate up 2bps to 4.91%, driving a steeper curve. The gap between 5-year and 30-year Treasury yields widened to 117bps, the steepest since 2021. While the initial reaction for the 10-year rate yesterday was to push higher, that yield has fallen overnight to 4.26%, down 2bps for the day and 5bps lower since the NZ close.
US second-tier economic releases were stronger than expected and only had a temporary influence on the market. While durable goods orders were weighed down by lower aircraft orders, the core figures were stronger, with orders ex transportation rising 1.1% m/m, challenging the narrative that business investment was weaker owing to higher tariffs. Consumer confidence, as measured by the Conference Board, fell 1.3pts to 97.4 in August, higher than expected following an upward revision to the previous month. The labour market indicator, measuring the difference between those saying jobs were plentiful versus those saying jobs were hard to get, declined further, continuing the steady downward trend over the past few years, consistent with a gradually weaker labour market.
Steeper yields curves have not only been confined to the US, with that dynamic being a global theme this year, with upward pressure on 30-year rates for the likes of the UK, Europe and Japan as well, as the market focuses on the sustainability of fiscal policy and higher public debt levels. Pressure remains on French assets where disagreement on how to reduce the fiscal deficit will likely lead to a collapse of the government, with PM Bayrou’s grip on power tenuous. France’s 10-year rate trades above those for Italy, Spain and Greece. France’s CAC40 index fell 1.7% following yesterday’s 1.6% fall.
In currency markets, the USD is broadly weaker, after the market fully digested Trump’s move to fire Governor Cook. Currency moves have been modest though, with the NZD pushing up through 0.5860 while the AUD is up towards 0.65. NZD cross movements have been minimal.
US equities initially reacted negatively to the firing of Governor Cook with S&P500 futures down as much as ½%, but this attracted buyers to the market, and they fully recovered. The cash market shows a modest gain for the day.
On tariffs President Trump said he’ll impose a “very substantial tariff” on imported furniture soon, saying that a 100-200% tariff would have prevented China from becoming dominant in the furniture industry. Expect the cost of furniture in the US to shoot higher, after the tariff is implemented. Meanwhile, as previously promised, India faces a 50% tariff from later today for punishment for buying Russian oil.
The domestic rates market continues to trade in the wake of the RBNZ’s dovish pivot last week, with further downside pressure on short end rates seeing the 2-year swap rate close down 2bps to a fresh cycle low of 2.89%. ASB launched a 5-year fixed notes deal which will meet strong demand in a corporate market starved of paper, and this supported a 2bps fall in the 5-year swap rate to 3.32%, also a multi-year low, while the 10-year rate was unchanged at 3.89%.
NZDM announced that it would launch the syndication of a new 2050 inflation-linked bond in the week beginning 8 September, seeking to raise at least $1b and the deal capped at $2b. This added upside pressure to ultra-long NZGB yields, resulting in further curve steepening. Short end NZGB yields were down 1-2bps, the 10-year rate was flat at 4.38% and ultra long bonds rose 2bps.
On the calendar today, Australian monthly CPI data will be released on another light day of economic releases.
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