Two weeks ago, “it was almost a certainty” that the Federal Reserve would not lower interest rates in 2025 and there was a growing minority believing the Central Bank might actually raise rates.
Today the market has fully priced two quarter point cuts this year and most believe a third one is possible in 2026.
The inherent contradiction is that similar respondents believe tariffs are inflationary, a major reason as to why inflationary expectations are at 30-year highs according to the vast majority of sentiment surveys.
Monetary policy and bond prices are greatly dependent upon inflationary expectations, expectations that are now completely disregarded.
A Bloomberg headline read yesterday “Treasury Investors Anticipate Fed Shift Back to Growth Risks.”
Next week many top-tier economic indicators are released. What will the data suggest? Will inflationary expectations rise further and become the market narrative or will the above headline prove to be prophetic?
Changing topics, the Trump Administration reached an agreement with Ukraine about rare earth minerals, partially to repay the US the billions in aid that has been given to that country.
Is this a major change in foreign policy? Some believe this is nothing short of reparations, akin to settler colonialism and the start of a new neo colonialist movement. There is little US precedent to this type of policy.
Some believe crossing into this realm is equivalent to the Biden Administration forcing Russia to default at the start of the Ukrainian war as Russia was banned from using the international payment system to pay its obligations to international creditors. Russia had the funds but not the pathway thus forcing a default.
This was the first time since the 1945 inception of this global payment system was used in such manner and is a major cause of the rise of another possible reserve currency. The number of countries in the “BRICs” surged about seven-fold and many countries are diverting part of their currency reserves into something other than the dollar.
The world is radically changing, a change that is not perhaps discounted in the markets. The possible outcomes are infinite.
Markets reversed moderate gains to close mixed as growth and inflation fears rose. Approximately 41% of the S & P 500 revenue is from global trade, a revenue stream that produces the majority of its earnings. For some sectors global trade is over 70% of revenue and is also the home of its manufacturing operations.
Is this change in foreign policy a possible reason for yesterday’s reversal?
After the close NVDA posted results that are interpreted several ways. At one juncture shares were down over 4%, at other times up 4%. At the time of this writing shares are posting about a 1.5% premarket advance.
Last night the foreign markets were mixed. London was up 0.38%, Paris down 0.24% and Frankfurt down 0.53%. China was up 0.23%, Japan up 0.30% and Hang Seng down 0.29%.
Dow and NASDAQ futures are up 0.25% and 0.5%, respectively. The 10-year is off 10/32 to yield 4.30%.
