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Morning Bid U.S.

What matters in U.S. and global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets, Reuters Open Interest

Despite the edgy political and policy backdrop, world markets seem to be doing just fine, eking out new records for stocks as bonds are being bought to boot.

I'll discuss all the market news below, and then I'll explore how the Trump administration’s push to reform the Fed might have deeper and longer-lasting impacts than the removal of Jerome Powell.

I’d love to hear from you, so please reach out to me at mike.dolan@thomsonreuters.com.

Data refreshes every time you open this email. For more U.S. market news, click here. Please send any feedback to morningbid@thomsonreuters.com.

Today's Market Minute

Japan's election outcome may put the central bank in a double bind as prospects of big spending could keep inflation elevated while potentially prolonged political paralysis and a global trade war provide compelling reasons to go slow on rate hikes.
A growing number of European Union member states, including Germany, are considering using wide-ranging "anti-coercion" measures targeting U.S. services if the EU cannot reach a trade deal with U.S. President Donald Trump, EU diplomats say.
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? Read the latest from ROI markets columnist Jamie McGeever.
The European Union's latest effort to restrict Russia's oil revenue is unlikely to hurt Moscow's war effort severely, leaving U.S. President Donald Trump's threat of secondary sanctions one of the few remaining economic levers to pressure the Kremlin, writes ROI energy columnist Ron Bousso.
A key difference in crude oil demand forecasts between this year and 2024 is that both OPEC and the International Energy Agency are being far more cautious in their growth expectations. ROI Asia Commodities columnist Clyde Russell explains why this matters.

Markets oddly serene

U.S. tariff hikes are likely coming next week, public debt is rising and Federal Reserve independence is being questioned - but the U.S. and world economies seem to be chugging on regardless, well through the northern summer.

Annualized U.S. economic growth is running about 2.4% at midyear and U.S. economic surprise indexes are more positive than they have been for a couple of months, with global equivalents at their most positive in more than a year. U.S. financial conditions indexes are the loosest in three years.

With big-tech megacaps due to start reporting Wednesday with Alphabet and Tesla updates, the earnings season just unfolding is already ahead of low-bar expectations. With about 12% of S&P500 firms now reported, the blended estimate of annual profit growth is running at 6.7% - about a point faster than was seen at the start of July.

The new highs for the S&P500 and Nasdaq on Monday were less surprising given all that, even though the daily moves were marginal and futures basically flat ahead of Tuesday's bell.

There's been little new on the trade tariff front, even though European Union warnings late Monday of its willingness to use a range of retaliatory measures if faced with higher levies dampened the equity market mood somewhat on Tuesday.

Relief that weekend Japanese upper house elections did not force an immediate resignation of Prime Minister Shigeru Ishiba saw the yen pop higher on Monday and 10-year Japanese government yields fell sharply as Tokyo markets reopened on Tuesday. The Nikkei lost early gains.

The drop in U.S. and European short- and long-term Treasury yields on Monday was perhaps more surprising, pulling the dollar back down in the process as the focus switched to Japan.

While some of that was given back on Tuesday, the buoyancy of the long end of the U.S. curve was remarkable given Fed independence concerns.

Even though Fed policymakers are in a blackout period on policy statements ahead of next week's meeting, embattled Fed boss Jerome Powell is due to give opening remarks to a Fed regulatory conference on Tuesday.

All of which brings us back to the Fed poser, the political pressure on the central bank to accelerate interest rate cuts and threats to Powell's position over anything from historical Fed policy performance and its involvement in non-monetary issues to how he managed rennovations of the headquarters.

Fed reform may move markets more than Powell ouster

Changing the way the Federal Reserve operates or assesses the economy may have a more durable impact on policy and markets than firing the Fed boss.

U.S. Treasury Secretary Scott Bessent added another twist to President Donald Trump's ongoing criticism of Fed Chair Jerome Powell on Monday by claiming he wanted to review the entire Fed institution and its performance.

In an interview with CNBC, Bessent claimed the Fed's "fear-mongering over tariffs" without significant signs of inflation was justification for considering a root-and-branch review of the central bank's functioning.

"What we need to do is examine the entire Federal Reserve institution and whether they have been successful," he said. "All these PhDs over there, I don't know what they do."

It's not yet clear whether Bessent was merely heaping more pressure on the Fed to speed up interest rate cuts, as Trump has been demanding almost daily, or whether the administration is actually planning to conduct a formal review of Fed operations, analysis and execution.

Graphics are produced by Reuters.

While recent weeks have been filled with anxious noise about Trump attempting to fire Powell, this latest development - possible changes to the way the Fed ticks - could be much more far-reaching and impactful than simply truncating the tenure of one Chair.

Of course, the Fed Chair is an important role, and a politically motivated ouster would be a serious challenge to Fed independence. Yet the Fed boss ultimately remains just one vote on the rate-setting board, and the Fed's policymaking structure is partly designed to insulate the central bank from any undue political influence.

The Federal Open Market Committee that sets policy is made up of seven Fed board members and five regional Fed bosses, but the FOMC chair and vice chair are voted in by the committee at the start of each year. The Fed Chair typically takes the helm by convention, but not necessity.

If a majority of the FOMC members balked at a politically partisan appointee to the top job, they could theoretically vote for a different Chair of the FOMC in an act of defiance.

But, regardless, the Chair is still only one vote.

Changing the Fed's institutional structure would require Congressional approval, a process likely to be protracted as many Republicans, including strong Trump supporters, may be wary of tampering with the Fed.

Moreover, a recent Supreme Court ruling also suggested Fed structures should be left in place due to "a special historical status".

But influencing the way the Fed thinks, forecasts and operates is a different matter.

Read the full column