By Michael Every of Rabobank
“I’m just here for the cotton candy”
Naturally, the market didn’t Fink about a new globalization yesterday. Rather, it fought on weaker US data: ADP employment 37K vs. 114K expected, ISM services 49 vs. 52. That apparently means “rate cuts!” again even as the ISM prices paid were 68.7 vs. 65.1.
We have updated our US forecasts with the next –and final– Fed cut now seen in September. However, these are openly –and correctly– dependent on binaries in trade, the fiscal front, and Fed independence. In which regard, it’s been another news rollercoaster even if many in markets prefer to focus on the monetary cotton candy that’s always due to them.
In geopolitics, President Trump posted that after talking to President Putin he expects Russia to retaliate to the recent Ukrainian drone attack on its airforce,… which Steve Bannon says the CIA aided without telling the President. If that’s true it would further underline my “DM = EM” argument. And, sorry economists/markets, but armed agencies capable of Gulf of Tonkin-style incidents not under executive control are far worse than rates-setters who are.
Moldova’s PM warned Russia wants to deploy 10,000 troops in its breakaway region of Transnistria, which would threaten both that EU-applicant, which faces elections in September, and Ukraine’s western flank. What will the EU do? And note I said ‘EU’ not ‘US’.
Spend more for a start. Denmark is to drop its ‘frugal’ stance on the EU budget to counter the threat from Russia; and the EU just freed up Covid cash for defence firms, who can apply for €335bn initially earmarked for the climate and digital investment.
However, as the Financial Times puts it, the EU faces a crucial five weeks ahead where the US can pressure it on trade, Ukraine, and NATO, and on each vs. the other (“Give me a good trade deal or I won’t support Ukraine; and if I do, spend even more on defence.” Yet notably, the EU officials quoted by the FT as recognizing how much trouble Europe is in didn’t mention LNG or dollar swaplines as other US pressure points on it. There’s only so much anyone can focus on at once.)
US Defence Secretary Hegseth will today skip a meeting of 50 of his counterparts in Europe to make that point, and there are reports the US told the EU it won’t provide air support to forces they place in Ukraine, showing the vital American role in Western defences. Without it, the EU can’t project force without risking potentially high casualties. Yet even jets don’t mean much vs. drones now, which would require a drone- or laser-based defense network the EU also lacks.
Others don’t. Israel’s defense sector is to unveil three new laser-based air defense systems, one of which can hit a coin from 10km. Of course, Israel-EU and Israel-UK relations are currently in crisis: while the US just vetoed a UN Security Council resolution calling for an immediate ceasefire in Gaza, 14 of the other 15 members, including France and the UK, voted in favor.
Trump said Putin may help negotiate a nuclear deal with Iran, for which ‘time is running out’. Yet Iran’s Khamenei tweeted: “The rude and arrogant leaders of America repeatedly demand that we should not have a nuclear programme. Who are you to decide whether Iran should have enrichment?” Its chief negotiator added: “Iran has paid dearly for these capabilities, and there is no scenario in which we will give up on the patriots who made our dream come true… No enrichment, no deal. No nuclear weapons, we have a deal.” That sounds OK until one sees what the IAEA says Iran has done with enrichment: try to get nuclear weapons. One way or the other, this still looks explosive for markets eventually.
In trade, China said it may buy hundreds of Airbus jets from Europe, obviously playing it against the US and that trade and geopolitics are separate to it even as Beijing backs Russia vs. Ukraine.
US automakers are considering opening production lines in China to assure supplies of the vital raw earths without which Western supply chains will soon grind to a halt: those minerals are now being strictly embargoed by Beijing after China gained control of them all years ago as western economists said, “This is fine,” while drinking coffee. Yet today those US auto firms will then face US tariffs that make economists spit their coffee.
The EU said talks with the US are moving in the “right direction” as its chief trade negotiator asked D.C. to cooperate vs. the “real threat” on steel, China. That’s a stance the US has pushed Europe to take more generally – to no avail so far: and it has absolutely nothing to do with the sudden Chinese offer to buy hundreds of Airbuses. Honest.
Summing things up, Trump posted that Xi Jinping is very hard to deal with on trade.
In politics, Elon Musk urged Americans to contact their lawmakers to “KILL” Trump’s Big Beautiful Bill. The CBO said the BBB will add $2.4 trillion to federal debt over a decade; that’s as Trump backed removing the debt ceiling; and Steve Bannon –again– said the only true fiscal solution now is to tax the rich more.
The White House said Columbia University no longer meets its standards for accreditation due to its inaction on antisemitism, a huge blow to it; and Trump ordered a travel ban from Afghanistan, Burma, Chad, Republic of the Congo, Equatorial Guinea, Eritrea, Haiti, Iran, Libya, Somalia, Sudan and Yemen, with partial restrictions from Burundi, Cuba, Laos, Sierra Leone, Togo, Turkmenistan, and Venezuela.
Meanwhile, as the EU looks in shock at the US, former French PM and Brexit negotiator Barnier accused EC Commission President Von der Leyen of a drift to authoritarianism, just after she won the Charlemagne European prize for successfully handling “crises of historic proportions”.
In markets, oil dipped as Saudi Arabia flagged it wants to get more aggressive on OPEC+ supply (and its own market share) – which hurts Russia (and to a lesser extent, Iran).
Yet the Fed’s Beige Book pointed to slowing US growth and rising prices, so stagflation. Moreover, Fed whisperer @NickTimiraos underlined the BLS –which will soon discontinue the calculation and production of many indices for PPI data– hasn’t had the resources to collect data from two (soon to be three) metros used for CPI. Who needs ‘accurate’ inflation numbers, eh?
Trump also attacked the Fed for not cutting rates fast enough: “ADP NUMBER OUT!! ‘Too Late’ Powell must now LOWER THE RATE… He is unbelievable!!! Europe has lowered NINE TIMES!” Markets might shrug but we get a new Fed Chair in under a year: there might need to be some new Fink-ing at that point, if not well beforehand.
In our ECB strategists’ view, we will probably get another cut today to a 2% base rate, but high uncertainty will force the Bank to keep all options open and we don’t expect clear guidance from Lagarde’s press conference.
After all, the Financial Times editor Martin Wolf today argues what I did a year ago via my 2025 financial markets outlook theme, ‘The Year of Living Dangerously’: ‘Interest rates are normal, the world is not’. In short, we could easily face a global recessionary shock, or an inflationary one, or both at once – and markets will have to adjust.
One can shrug this all off ‘because cotton candy’; but perhaps one can only do so because of where it’s located.
