Dollar Weakens, 30-Year Yield Rises on Fed Concerns: Market Summary
The dollar weakened against longer-dated U.S. Treasury bonds as President Donald Trump's attempt to oust Federal Reserve Chair Lisa Cook fueled concerns about the long-term outlook for inflation.
The yield on the 30-year U.S. Treasury bond rose two basis points to 4.91% as the move against Cook fueled concerns that price pressures could intensify if Trump reshuffles the Fed's policymaking committee. The yield on the two-year Treasury bond fell on speculation of lower interest rates. The dollar weakened 0.2%, while S&P 500 futures fell 0.1%. Nvidia Corp. rose 0.4% in pre-market trading ahead of its earnings release on Wednesday.
In Europe, the Stoxx 600 fell 0.6% after French Prime Minister Francois Bayrou called a no-confidence vote that could bring down his government as early as next month. France's CAC 40 index plunged 1.5% to its lowest level in two weeks. The yield premium on French 10-year bonds over German bonds widened three basis points to 78 basis points, the highest since April.
Risk appetite took another hit after Trump renewed his aggressive trade tactics, threatening new tariffs and export restrictions on advanced technology and semiconductors in retaliation for overseas digital services taxes. Stocks and bonds were already under pressure after the optimism following Fed Chairman Jerome Powell's Jackson Hole speech faded on Monday. Doubts about the pace of easing persist ahead of this week's inflation report, which is expected to highlight strong price pressures.
"If the Fed is perceived as giving in to pressure from the administration and cutting rates prematurely to appease the White House, inflation risks becoming more entrenched," said Tom Essaye at The Sevens Report. "Since longer-term bond yields trade primarily based on inflation expectations, this pressure pushes up 30-year Treasury yields."
As for France, "the performance gap between French and European equities will only widen from here," said Andrea Tueni, head of sales trading at Saxo Banque France. "The next big step would be for the French 10-year bond yield to surpass the Italian bond yield; that would be a significant milestone." For the Fed, the swap implies about an 80% chance of a quarter-point rate cut by the Fed next month, with at least one more expected by the end of the year.
Forcing Cook out would give Trump the opportunity to secure a four-member majority on the Fed's seven-member Board of Governors. Trump has said he has "sufficient grounds" to fire Cook, based on allegations that he made false statements related to one or more mortgage loans.
Cook has said Trump does not have the authority to fire him, and he will not resign. Cook's lawyer, Abbe Lowell, said they plan to take "whatever action is necessary to prevent" Trump's "illegal actions." The Fed declined to comment.
"Bond investors are unhappy with how Trump continues to interfere with the Fed and threaten its independence," wrote Russ Mould, investment director at AJ Bell. The move to oust Cook "will fuel speculation that the US president will push for a replacement governor more in line with his thinking." (alg)
Source: Bloomberg
