Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

U.S. and world stocks posted solid gains on Monday as the dollar and bond yields fell, while encouraging corporate earnings and investor optimism that the economic damage from tariffs won't be too severe also boosted risk appetite.

More on that below. In my column today I look at President Trump's attacks on Fed Chair Jerome Powell in the broader context of U.S. and global central bank independence. 

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Equity investors have the bit between their teeth. Despite huge uncertainty surrounding U.S. tariffs and trade deals, and unease about U.S. President Donald Trump's tirades against Fed Chair Jerome Powell, stocks continue to march higher. 

Monday's whoosh was supported by solid U.S. coroprate earnings, a weaker dollar and a lower Treasury yields. Investors also continue to bet that the economic damage from tariffs will be milder than feared.

U.S. Commerce Secretary Howard Lutnick said on Sunday he was confident of securing a trade deal with the European Union, even as the EU explored possible counter-measures against the United States. 

Trump has threatened 30% tariffs on imports from Mexico and the EU, and sent letters to other trading partners, including Canada, Japan and Brazil, setting tariffs ranging from 20% to 50%. This has led experts to raise their running effective aggregate U.S. tariff rate estimates to near 20%. 

That would be be the highest since 1933 and around eight times higher than they were at the end of last year, although sharply down from the April 2 Liberation Day extremes.

Right now, investors are shrugging this off, and one can understand why. Trump quickly climbed down after the post-Liberation Day market volatility, the August 1 deadline may be pushed back, and the final tariff rates could be different from those announced. 

U.S. economic data and second quarter earnings are generally beating forecasts too. Even if that is because consumers and businesses have, to varying degrees frontloaded purchases, sales or production ahead of the final tariffs, the incoming numbers are solid. 

Citi's U.S. economic surprises index has been rising steadily for the past month, albeit it from deeply negative territory, while the equivalent European surprises index is flat-lining and China's has been falling.

Meanwhile, Japan's markets reopen on Tuesday after Monday's holiday, giving stock and bond investors their first chance to react to Sunday's upper house election which saw the ruling coalition lose its majority. Prime Minister Shigeru Ishiba has vowed to stay in situ, citing the looming August 1 tariff deadline with the United States. 

Nikkei futures are currently pointing to a flat open on Tuesday.

If U.S. President Donald Trump's public attacks on Federal Reserve Chair Jerome Powell have achieved one thing, it has been to thrust the issue of central bank independence firmly into the spotlight. But this raises the question, what does 'independence' really mean?

Central bank independence is widely considered a bedrock of  modern-day financial markets. Economists, investors and  policymakers almost universally agree that monetary policy  should be set for the long-term good and stability of the  economy, free from short-term and capricious political  influence.

But maintaining that theoretical separation between  policymakers and politicians is very challenging in practice. 

Ultimately, central banks are creations of – and, to varying  degrees, extensions of – their national governments. The  legislatures determine their statutes, parameters, goals, and  key policymaking personnel. 

One need only look at the intertwined and often coordinated  responses of countries' central banks and governments to the  global financial crisis and pandemic for evidence that complete  independence doesn't actually exist.