Trading Day: Is the only Fed doubt now a 25 or 50 bps cut?

By Jamie McGeever

ORLANDO, Florida (Reuters) -TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Stocks rose around the world on Wednesday, and bond yields and the dollar fell, as comments from U.S. Treasury Secretary Scott Bessent fueled traders' bets that the Fed will cut interest rates next month, perhaps even by half a percentage point.

More on that below. In my column today I suggest that what's giving Fed Chair Jerome Powell his biggest headache right now is not the pressure or attacks from U.S. President Donald Trump, but the inconclusive economic data.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Fed cut seen near certain after inflation data, Bessentcomments 2. U.S. embeds trackers in AI chip shipments to catchdiversions to China, sources say 3. Just in time? Manufacturers turn to AI to weather tariffstorm 4. China July bank loans unexpectedly contract for firsttime in 20 years 5. Stablecoins fuel liquidity, not yet money: Mike Dolan

Today's Key Market Moves

* FX: Dollar falls again, lowest in nearly three weeks onindex basis. Biggest G10 FX mover is sterling, up 0.5%. * STOCKS: MSCI All Country, Canada, Japan, S&P 500 andNasdaq hit new highs. Chinese stocks now up 16 of last 20sessions, Wall Street's VIX volatility index falls to 2025 low. * SHARES/SECTORS: Beaten-down healthcare, and basicmaterials sectors lead Wall Street rally, both up around 1.7%. * BONDS: U.S. yields down across the curve, as much as 6bps at the long end. The 'MOVE' implied volatility index fallsto lowest since January 2022. * COMMODITIES: Oil falls to lowest in more than twomonths. Brent crude touches $65/bbl, WTI dips below $62/bbl.

Today's Talking Points:

* Fed policy. In the realms of market pricing, a rate cut next month is now a nailed-on certainty, with traders putting the chances of a quarter point cut at 99.9%.

This wager was strengthened by comments from Bessent, who told Bloomberg News a 50-basis point cut was possible.

Bessent's comments are the latest in a growing list of verbal interventions - or outright political interference - from the Trump administration in the business and economics arena it traditionally steers clear of, like the Fed, non-partisan institutions, and private sector companies and banks.

* Trump's Fed nominations. Bessent said early on Wednesday that no fewer than 11 candidates were being considered to replace Powell, whose term expires in May (or, earlier, if he is fired or resigns).

The president later shortened that list to three or four.

Interestingly, absent from Bessent's list was current Council of Economic Advisers Stephen Miran, nominated to fill an open Fed board seat with a term that ends in January.

* Trump-Putin meeting. The U.S. and Russian leaders are scheduled to meet in Alaska on Friday, a face-to-face which Ukraine's allies hope will see Trump urge Putin to agree a ceasefire without selling out Kyiv's interests or carving up its territory.

Trump, Ukraine's Volodymyr Zelenskiy and European leaders met in a last-ditch videoconference on Wednesday to lay out Ukraine's red lines, a call Trump said was "very friendly".

France's Emmanuel Macron said Trump was "very clear" that he wants to achieve a ceasefire in Alaska.

Fed more hamstrung by murky data than Trump interference

It's widely believed that U.S. President Donald Trump's insistence on lower interest rates is what's making life most difficult for Federal Reserve Chair Jerome Powell and his colleagues. But what's causing the biggest headache for Fed officials is, in fact, probably more prosaic: economic data.

The key challenges facing Powell were encapsulated perfectly on Tuesday by the release of an inconclusive U.S. inflation readout followed by Trump's latest verbal attack – and threats of a "major lawsuit."

Politics aside, most Fed officials agree that rates will fall this year, with the median "dot plot" in the Fed's June Summary of Economic Projections pointing to 50 basis points of easing through December. Traders are betting heavily that the first move will be in September.

But it's tough to justify that confidence based purely on economic data. While some indicators suggest policy should be eased sooner rather than later, others indicate that would be a high-risk move. Looking at the "totality of the data," to borrow a phrase from Powell, there is no clear signal either way.

PLENTY NOISE, FEW SIGNALS

Consider the latest U.S. inflation and employment reports, the two most important data sets. On their own, they don't appear soft enough to warrant the Fed trimming rates right now, but they also aren't firm enough to dispel the notion that policy easing is only a question of "when" not "if." 

Annual headline CPI inflation held steady in July at 2.7%, contrary to an expected rise, with month-on-month increases in line with forecasts. But annual core inflation rose more than expected to 3.1%, the highest level since February and still meaningfully above the Fed's 2% target. 

Economists calculate that durable goods prices rose 1.7% in the first six months of the year – the biggest six-month rise since 1987, excluding the COVID-19 pandemic. They warn there is likely more of that to come as Trump's tariffs kick in. 

"July's CPI data are probably more worrying under the surface than in the headlines, and we expect the upward pressure to goods inflation to build in the coming months," James Pomeroy, a global economist at HSBC, wrote on Tuesday.

Meanwhile, last week's employment report showed job growth in July was much weaker than anticipated, and, more importantly, downward revisions to the previous two months were among the biggest on record. 

But these ominous signals were offset by accelerating wage growth, an increase in hours worked, and a meager rise in the unemployment rate. Hardly signs of a shaky labor market.

Nevertheless, markets focused more on the softer elements in the jobs data, suggesting investors think the Fed's bar to easing is much lower than the bar to standing pat. Indeed, the rates market is now pricing in a near-100% chance of a cut at the U.S. central bank's September 16-17 meeting.

RISK MANAGEMENT

But markets may be getting ahead of themselves.

Powell has indicated that a rise in the unemployment rate is needed for the Fed to act. But that rate is potentially being distorted by post-pandemic labor supply issues - employers' reluctance to fire workers and Trump's immigration policies are limiting the number of people looking for work. 

Regardless, cutting before seeing a meaningful rise in the unemployment rate would be tough to justify, creating a significant communications problem for Powell. 

And on a more fundamental level, as economist Phil Suttle noted on Tuesday, is preparing to cut rates at full employment just as inflation is accelerating good risk management?

This is a particularly apt question when looking at financial markets: the S&P 500 and Nasdaq, gold, and bitcoin are all near record highs, and corporate bond spreads are the tightest in years. This hardly looks like a restrictive policy environment.

In that light, patience and caution would appear justified, especially given the added risk of appearing to buckle under Trump's political pressure. If the Fed wants to cut, Powell could use some cover. Unfortunately for him, he's unlikely to find that in this noisy data.

What could move markets tomorrow?

* Australia unemployment (July) * China's JD.com earnings (Q2) * UK GDP (Q2, preliminary) * UK industrial production (June) * UK trade (June) * Euro zone GDP (Q2, flash estimate) * Euro zone unemployment (Q2) * Euro zone industrial production (June) * U.S. weekly jobless claims * U.S. producer price inflation (July) * U.S. Fed officials on the stump: Richmond Fed PresidentThomas Barkin, St. Louis Fed President Alberto Musalem * U.S. earnings - Cisco Systems, Deere & Company

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever; Editing by Nia Williams)