Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Many world markets took a breather on Monday as investors awaited the outcome of U.S. President Donald Trump's extraordinary meetings with Ukraine's Volodymyr Zelenskiy and many European leaders, and looked ahead to Fed Chair Jerome Powell's keynote speech in Jackson Hole later in the week.

More on that below. In my column today I ask whether U.S. consumer spending can be sustained, which would keep the economy growing and steer it away from recession. Much will depend on how the rich feel about their finances. 

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* Europe goes to Washington. U.S. President Donald Trump's intense, hastily-arranged summitry continued on Monday as he welcomed Ukraine's President Volodymyr Zelenskiy to the White House to discuss how to end the Ukraine-Russia war. This follows Trump's meeting with Vladimir Putin in Alaska on Friday, which was a success for the Russian president but yielded little for Trump.

And that meant little for Ukraine or Europe, which explains the extraordinary sight of Zelenskiy being backed in Washington on Monday by many of Europe's most powerful leaders, including Germany's Friedrich Merz, France's Emanuel Macron, Britain's Keir Starmer and NATO's Mark Rutte.

Trump's appearance with Zelenskiy before the cameras was cordial and even friendly, in stark contrast to their acrimonious meeting in February. Trump said the US would help Europe in providing security for Ukraine as part of any deal, but also suggested to reporters that he no longer believed a ceasefire was a necessary prerequisite for striking a peace agreement.

* Jackson Hole. Attention is now turning to the annual Kansas City Fed's symposium in Jackson Hole, Wyoming, which gathers Fed officials, central bankers and leading economists from around the world to discuss the challenges facing the global economy. Fed Chair Jerome Powell's speech on Friday is the keynote event.

Leaving aside any possible long-term policy steers, such as changes to QT or tolerating slightly higher inflation, the main focus is whether he leans toward a rate cut in September or not. 

Rates traders still think he will, but their conviction is ebbing by the day. They are now attaching an 82% probability of a quarter-point cut next month, the lowest likelihood since the unexpectedly weak employment data on August 1. 

* Long-end bond blues. Yields on 30-year sovereign bonds in major countries around the world continue to rise. In some cases, like that of Germany, they are now the highest in many years as investors begin to fret again about inflation and fiscal spending plans. 

Many investors are also questioning the wisdom of the Fed resuming its easing cycle next month, which is what's currently priced into rates futures markets, with inflation above target, unemployment at a historical low, stocks at record highs and financial conditions the loosest in years. 

Even the long of China's bond market is feeling the squeeze. The 30-year yield spiked 8 basis points to 2.12% on Monday, the highest in five months and biggest one-day rise since October. And this is in China, where the deflationary pressures of the last few years are showing no sign of lifting.

U.S. consumer spending's surprising resilience is the main reason the economy has not only avoided recession, but continued to grow at a solid clip. The big question now is whether American households can keep that going, especially with higher, tariff-fueled prices coming down the pike.

In the U.S., "the consumer" is king. Consumer spending accounts for around 70% of total economic output, so changes in people's propensity to spend have a direct, outsized influence on the health of the economy.

But "the consumer" is, of course, actually millions of people. And when you split them into groups based on income and wealth, it becomes clear that total spending disproportionately comes from the rich. 

Mark Zandi, chief economist at Moody's Analytics, said earlier this year that the richest 10% of Americans, those earning at least $250,000 a year, now account for half of all consumer spending. That's a record. Thirty years ago, the richest 10% accounted for 36% of all consumer spending.

A Boston Fed paper last week backed up Zandi's findings, concluding that the strength of aggregate consumer spending in the last three years is due to high-income earners. But the authors suggest high-income consumers have a reasonable cushion because they haven't maxed out their credit cards. 

While the lower-income and middle-income cohorts both saw their credit card debt soar past pre-pandemic totals in the last few years, wealthier Americans' credit card debt remains below the 2019 high and well below the level implied by the pre-pandemic trend. So, if necessary, they still have room to borrow to fund their spending.