Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Another batch of upbeat U.S. economic data including solid retail sales boosted risk appetite on Thursday, pushing to the back of investors' minds President Donald Trump's attacks on Fed Chair Jerome Powell and lifting the S&P 500 and Nasdaq to fresh record highs.

More on that below. In my column today I pose the question: Would Powell's enforced departure, a monumental event in Fed history, crater markets or is such an eventuality actually largely priced in already?

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Amid the frenzied Trump-Powell drama and heightened uncertainty around tariffs, U.S. economic data has quietly been coming in on the strong side. 

Thursday's figures reinforced that view, with the Philly Fed business index, producer price inflation, import prices and retail sales all pointing to an economy humming along at a solid clip with little sign of accelerating inflation.

The Atlanta Fed's GDPNow model estimate is signaling 2.4% growth in the second quarter, comfortably above blue chip consensus forecasts of 2.0%. 

Perhaps expectations were set so low following the post-Liberation Day chaos and market scare, but Citi's economic surprises index is now the highest since late May. 

Either way, the data broadly appears to be holding up, and the early indications from the earnings season getting under way are that U.S. corporate profits continue to beat expectations too. The highlights on Thursday were from United Airlines and PepsiCo. Friday's spotlight falls on American Express.

That's the backdrop against which U.S. rates traders are pushing out the expected timing of the first rate cut to October from September. San Francisco Fed President Mary Daly on Thursday signaled two rate cuts this year is a reasonable projection.

The global equity picture was also brightened on Thursday by Taiwan's TSMC, the world's main producer of advanced AI chips. It posted a record quarterly profit and said demand for artificial intelligence was getting stronger. TSMC's domestic shares hit a six-month peak, and its U.S.-listed shares leaped over 4% to a new high. 

On the trade front, Trump says a deal with India is "very close" and one with Europe is "possible", while Commerce Secretary Howard Lutnick held a 45-minute phone call with Japan's top trade negotiator Ryosei Akazawa on Thursday.

Treasury Secretary Scott Bessent will travel to Tokyo to meet with Prime Minister Shigeru Ishiba on Friday for a separate event, but trade will surely be discussed, if not formally.

Japan is very much on investors' minds ahead of Sunday's Upper House election which could see the Liberal Democratic Party ruling coalition lose its majority, heightening calls for the government to boost spending and cut taxes.

The prospect of further fiscal slippage in the world's most indebted major economy and complications that would bring for the Bank of Japan have pushed the yen to a three-month low against the dollar and long Japanese Government Bond yields to record highs.

The yen fell on Thursday, swept aside in the dollar's broad rebound, but bonds got a reprieve. The weakness in 20- and 30-year JGBs has added to the downward pressure on long-dated U.S. and European bonds. Sunday's vote will be key to whether the yen retests 150.00 per dollar and whether JGB yields make fresh highs next week.

Whether Federal Reserve Chair Jerome Powell is fired next week, forced to resign in six months or allowed to muddle through to the end of his term next May, the supposedly sacrosanct notion of Fed independence has already been shattered. 

Yet what's nearly as remarkable as President Donald Trump's attacks on Powell for not cutting interest rates is financial markets' resilience in the face of this extraordinary degree of political interference in monetary policy, unprecedented in recent decades. 

Equity investors are known for being optimists, but today's Wall Street is veritably Teflon-coated.