Donald Trump may have reached peak cognitive dissonance on Friday, after the June jobs report blew away estimates and, in the process, undercut the case for a July rate cut.
“JOBS, JOBS, JOBS!”, an elated Trump screamed into the digital void in the course of retweeting a Breitbart article a couple of hours after the numbers were public.
Shortly thereafter, the president spoke to reporters about the economy. “We have great numbers this morning”, he said, before launching into an anti-Fed diatribe. “If we had a Fed that would lower interest rates we would be like a rocket ship, but we’re paying a lot of interest and it’s unnecessary”.
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Trump is now so accustomed to encroaching on Fed independence and publicly insulting Jerome Powell that he almost seems bored with it. “We don’t have a Fed that knows what they’re doing, so it’s one of those little things”, he continued.
Yes, it’s “one of those little things”. Such are the trials and tribulations of presiding over of an early-stage autocracy. Sometimes the head of the central bank just won’t bend the knee, even after you berate him for a solid year and call him on the phone all the time. Speaking of that, the Fed’s calendar shows Trump dialed up Powell on May 20. The two chatted for five minutes between 4:42 PM and 4:47 PM, hours before Powell delivered a speech in Atlanta.
In any event, thanks to “JOBS, JOBS, JOBS”, the dollar “rose, rose, rose” to its highest since June 19. We’re right back to the president’s “dollar insanity loop”. The MAGA economy argues for a stronger greenback, which in turn waters down the effects of the tariffs. It’s now very clear that any Fed-inspired dollar weakness will not be a one-way trade and there’s rampant speculation that Trump may actually resort to formal intervention sooner or later.
Meanwhile, stocks of course snapped a five-day win streak, as the scorching-hot payrolls print essentially ruled out a 50bp cut at the end of the month. That’s a real bummer for equities. Make good news bad again!
Barclays trimmed their Fed forecast from a 50bp, front-loaded cut in July to a plain old 25bp ease. For their part, Goldman sees a 60% chance of a 25bp cut, versus just a 15% chance of a larger move.
“A 50bps cut in July is now ‘off the board’ per OIS implied and a 25bps cut in July is now actually a ~94% probability, with ‘unch’ Fed now priced as just under a 6% potential from what was 0% prior to the data release this morning”, Nomura’s Charlie McElligott wrote, a couple of hours after payrolls.
The prospect of the Fed staying on hold this month (an outcome to which Goldman assigns a 25% subjective probability) still seems unthinkable given the fear of messy unwinds tied to crowded positioning. As we saw on Friday morning, rates moves are prone to sloppiness given how one-sided the trade has been. 2-year yields surged in the aftermath of the jobs report, jumping 11bp, the biggest move since January 4.
That kind of thing can be hazardous if it gets out of hand, which underscores the notion that while 50bp may be out of the question, another “on hold” meeting may simply be untenable, lest the Fed should risk a tantrum scenario. “I think ultimately they ease because they signaled it so strongly”, JPMorgan’s Michael Feroli remarked.
That said, a full cut in July was no longer priced in for the first time since the June FOMC on Friday morning.
(Bloomberg, h/t LK)
By the time it was all said and done, though, the market was still looking for more than a full quarter-point cut at the July meeting, something BofA thinks might be optimistic. “With a much stronger than expected June jobs report it becomes much harder for the Fed to justify cutting rates”, the bank wrote Friday evening, adding that “it seems to us the market has to be prepared for a Fed meaningfully more hawkish at its July 31st meeting than the more than 25bps rate cut currently priced in”.
Suffice to say one person who is not “prepared” for a Fed that’s “meaningfully more hawkish” is the president.
Trump has never accepted the fact that boasting about the economy while simultaneously demanding Fed cuts is contradictory. His Friday comments suggest an acknowledgement of that inherent inconsistency isn’t forthcoming.
The president continued to rail against the Fed until nearly midnight. “As well as we are doing from the day after the great Election, when the Market shot right up, it could have been even better – massive additional wealth would have been created, and used very well”, Trump tweeted, at 11:24 PM. “Our most difficult problem is not our competitors, it is the Federal Reserve!”