Trading Day: Econ surprise, Wall Street's new highs

By Jamie McGeever

ORLANDO, Florida (Reuters) -TRADING DAY 

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Another batch of upbeat U.S. economic data including solid retail sales boosted risk appetite on Thursday, pushing to the back of investors' minds President Donald Trump's attacks on Fed Chair Jerome Powell and lifting the S&P 500 and Nasdaq to fresh record highs.

More on that below. In my column today I pose the question: Would Powell's enforced departure, a monumental event in Fed history, crater markets or is such an eventuality actually largely priced in already?

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. Battered dollar a boon for U.S. multinational companies 2. U.S. companies adopt options strategies to shield eurorevenues in case dollar recovers 3. Lofty U.S. stock market valuations bank on earningsstrength 4. Reversing U.S. immigration set to grab market attention:Mike Dolan 5. Bank of England scrutinizes lenders for dollar risk amidTrump worries, sources say

Today's Key Market Moves

* The Nasdaq rises 0.7% to a new high just shy of 21000points, and the S&P 500 gains 0.5% to a fresh peak of 6304. * The U.S. small cap Russell 2000 spikes 1.2%. * Netflix shares fall 3% in after-hours trade, despite Q2earnings beating forecasts. * The dollar index rises to a near 4-week high, the yen hugsrecent 3-month low ahead of key Upper House election on Sunday. * Oil up more than 1.5%, supported by low inventories andrenewed Middle East risks. Brent crude $69.55/bbl, WTI$67.58/bbl.

Econ surprise, Wall Street's new highs

Amid the frenzied Trump-Powell drama and heightened uncertainty around tariffs, U.S. economic data has quietly been coming in on the strong side. 

Thursday's figures reinforced that view, with the Philly Fed business index, producer price inflation, import prices and retail sales all pointing to an economy humming along at a solid clip with little sign of accelerating inflation.

The Atlanta Fed GDPNow model estimate is signaling 2.4% growth in the second quarter, comfortably above blue chip consensus forecasts of 2.0%. 

Perhaps expectations were set so low following the post-Liberation Day chaos and market scare, but Citi's economic surprises index is now the highest since late May. 

Either way, the data broadly appears to be holding up, and the early indications from the earnings season getting under way are that U.S. corporate profits continue to beat expectations too. The highlights on Thursday were from United Airlines and PepsiCo. Friday's spotlight falls on American Express.

That's the backdrop against which U.S. rates traders are pushing out the expected timing of the first rate cut to October from September. San Francisco Fed President Mary Daly on Thursday signaled two rate cuts this year are a reasonable projection.

The global equity picture was also brightened on Thursday by Taiwan's TSMC, the world's main producer of advanced AI chips. It posted a record quarterly profit and said demand for artificial intelligence was getting stronger. TSMC's domestic shares hit a six-month peak, and its U.S.-listed shares leaped over 4% to a new high. 

On the trade front, Trump says a deal with India is "very close" and one with Europe is "possible", while Commerce Secretary Howard Lutnick held a 45-minute phone call with Japan's top trade negotiator Ryosei Akazawa on Thursday.

Treasury Secretary Scott Bessent will travel to Tokyo to meet with Prime Minister Shigeru Ishiba on Friday for a separate event, but trade will surely be discussed, if not formally.

Japan is very much on investors' minds ahead of Sunday's Upper House election which could see the Liberal Democratic Party ruling coalition lose its majority, heightening calls for the government to boost spending and cut taxes.

The prospect of further fiscal slippage in the world's most indebted major economy and complications that would bring for the Bank of Japan have pushed the yen to a three-month low against the dollar and long Japanese Government Bond yields to record highs.

The yen fell on Thursday, swept aside in the dollar's broad rebound, but bonds got a reprieve. The weakness in 20- and 30-year JGBs has added to the downward pressure on long-dated U.S. and European bonds. Sunday's vote will be key to whether the yen retests 150.00 per dollar and whether JGB yields make fresh highs next week.

Trump has already crossed Fed independence Rubicon

Whether Federal Reserve Chair Jerome Powell is fired next week, forced to resign in six months or allowed to muddle through to the end of his term next May, the supposedly sacrosanct notion of Fed independence has already been shattered. 

Yet what's nearly as remarkable as President Donald Trump's attacks on Powell for not cutting interest rates is financial markets' resilience in the face of this extraordinary degree of political interference in monetary policy, unprecedented in recent decades. 

Equity investors are known for being optimists, but today's Wall Street is veritably Teflon-coated.

Of course, Trump's attacks on Powell have not been without consequence. The dollar has clocked its worst start to a year since the United States dropped the gold standard in the early 1970s. Long-dated Treasury yields are the highest in 20 years, and the "term premium" on U.S. debt is the highest in over a decade.

Consumers' inflation expectations, by some measures, are also the highest in decades. Inflation has been above the Fed's 2% target for over four years, and the prospect of a dovish Fed under the stewardship of a new Trump-friendly Chair could keep it that way. 

But that's not solely down to Fed policy and credibility risks. The Trump administration's fiscal and trade policies, and unilateralist position on the world political stage, have also tempted some investors to trim their exposure to U.S. debt and the dollar. 

Still, Wall Street seems immune to all that, and it closed in the green on Wednesday after Trump played down a Bloomberg report that he will soon fire Powell, a step he says is "highly unlikely". Even at the point of maximum selling before that rebuttal, the big U.S. equity indices were down less than 1%. 

Given the magnitude of the news investors were reacting to, that's barely a ripple, especially when you remember that the S&P 500 and Nasdaq hit record highs only 24 hours earlier. 

Indeed, the S&P 500 is enjoying its third-fastest rebound from a 20% drawdown in history, according to Fidelity's Jurrien Timmer. Goldman Sachs analysts also note that the index's price-to-earnings ratio of 22 times forward earnings is in the 97th percentile since 1980. And the Nasdaq is up 40% in barely three months.

Taking all this into account, there's plenty of space for a correction. What's needed is a catalyst. Threatening the foundation of the financial system would seem to qualify, but will it?

BECOMING IMMUNE

One might argue that investors are simply skeptical that Trump really will oust Powell, even were it "for cause", ostensibly the Trump administration's ire over the $2.4 billion cost of renovating the Fed's building in Washington.

But Trump has made it clear for months that he wants Powell replaced by someone more malleable, so whether it happens in the coming weeks, months, or May next year, the new Fed Chair will almost certainly be someone strongly influenced by the president.

Of course, the Fed Chair is only one of 19 members of the Federal Open Market Committee and just one of 12 voting members at any given rate-setting meeting. He or she does not decide policy unilaterally. Still, the negative reaction to Powell leaving before his term is up could be powerful, even though you would expect it to be priced in to some extent by now.

All else being equal, a more dovish-leaning Fed will reasonably be expected to weigh on short-dated yields, steepen the yield curve, and weaken the dollar as bond investors price in more rate cuts, and keep inflation closer to 3% than 2%. In the short term, stocks could benefit from expectations of a lower policy rate, although higher long-dated yields would increase the discount rate, which could be particularly negative for Big Tech and other growth stocks.

JP Morgan CEO Jamie Dimon on Tuesday warned of the dangers of political interference in Fed policymaking, telling reporters on a conference call: "The independence of the Fed is absolutely critical. Playing around with the Fed can often have adverse consequences, absolutely opposite of what you might be hoping for." 

That Rubicon has already been crossed, and for now at least, markets appear to have accepted that.  

What could move markets tomorrow?

* Japan consumer price inflation (June) * Japanese Prime Minister Shigeru Ishiba meets U.S. TreasurySecretary Scott Bessent * Germany producer price inflation (June) * University of Michigan U.S. consumer sentiment, inflationexpectations (July) * U.S. Q2 earnings, focus on American Express

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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)