Last chance?

The Consumer Price index in the U.S. grew 2.7% over the last 12 months. It is worse than expected by consensus, and more importantly it provides a Powell a defense on his do-nothing policy. But beyond the economic implications for the economy, this is perhaps the last chance President Trump is giving Jerome Powell to lower rates on July 30th. At this point, he’s All-in and whoever does not align with him, must be ousted. He just need a “cause” and he found one: the Fed headquarters renovations are over budget. My way or the highway. But he probably does not want to fire him, he just wants to put as much pressure on him as possible, in order for him to resign. What if Powell does resign? What would the bond market do? What would the dollar do? The likely scenario will be a sell off on the long end of the curve, topping 5% and more weakness in the dollar, although both are crowded trades, and perhaps they have been anticipating this outcome. Whoever comes in as Chairman, will be cherry-picked to lower rates. And Trump has one number in his head: 1%. His logic is flawed, but that’s what he wants. He thinks that by lowering official rates, the whole yield curve will plummet, helping the budget by lowering interest expense, but it will likely do the opposite. If we look at Japan, Germany or the UK, that’s what’s happening. As it stands today, there will be no move on July 30th.

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