By Mike Dolan
LONDON (Reuters) – A look at what matters in U.S. and global markets today from Mike Dolan, Editor-At-Large, Finance and Markets
Even though some calm returned to U.S. bond and stock markets overnight after this week’s wave of fiscal policy anxiety, the dollar has continued to slide – with sterling leading the pack to its best levels against the greenback in three years.
It’s Friday, so today I’ll provide a quick overview of what’s happening in global markets and then offer you some weekend reading suggestions away from the headlines.
Today’s Market Minute
* U.S. Senate Republicans said on Thursday they will seek substantial changes to President Donald Trump’s sweeping tax and spending bill after it narrowly won approval in the House of Representatives, in a sign that significant hurdles remain for the package.
* The dollar headed for its first weekly fall in five weeks against major currencies on Friday and long-dated Treasury yields stayed elevated, as U.S. debt concerns that have mounted for years started driving moves in currencies and global debt.
* The German economy grew significantly more in the first quarter than previously estimated due to export and industry frontloading ahead of U.S. tariffs, according to a second estimate published on Friday.
* Japan’s new agriculture minister pledged on Friday to quickly move rice from government stockpiles to store shelves where they would be offered at prices significantly lower than current levels, seeking to stem a consumer shift to cheaper, foreign brands.
* Yields of government bonds with the longest maturities have risen sharply – not just in the United States, where the chaotic first months of Trump’s second term in the White House are causing investors to demand better returns on their bond holdings, but also in Japan and Britain.
* Oil prices dropped for a fourth consecutive session on Friday and were set for their first weekly decline in three weeks, weighed down by renewed supply pressure from another possible OPEC+ output hike in July.
* Global investors admit to flying blind in markets roiled by erratic U.S. trade rhetoric and chaotic economic forecasting, saying that placing long-term bets is harder now than at any time since the 2020 COVID-19 crisis.
Dollar keeps tumbling
Trump’s signature fiscal package of tax and spending – which is expected to lift U.S. debt piles by another $3.8 trillion or so over the coming decade – finally passed in the House of Representatives on Thursday. But only by one vote.
The bill now has to go to the Senate, which is likely to seek changes. A Republican majority 53-47 should eventually see it pass, but any changes will require the bill to return to the House for a new vote.
The bill allows for a $4 trillion rise in the U.S. debt ceiling. If it’s not passed by July, it’s estimated that the government will start running out funds in August.
After an initial spike to 19-month highs after the vote, U.S. long-term Treasury yields retreated again. But 30-year yields remain above 5% on Friday and nerves persist about the market reaction to baked-in deficits and rising debts.
Interest payments accounted for one out of every eight dollars spent by the U.S. government last year, more than the amount spent on the military, according to the non-partisan Congressional Budget Office. That share is due to grow to one dollar in six over the next 10 years as an aging population pushes up the government’s health and pension costs.
The steadying of the bond market on Thursday was helped by dovish comments from Federal Reserve Governor Christopher Waller, who said if there is some clarity on the tariff front, it might allow interest rates to come down in the second half of the year.
“If we can get the tariffs down close to the 10% and then that’s all sealed, done and delivered somewhere by July, then we’re in good shape for the second half of the year,” Waller told Fox Business. “Then we’re in a good position to kind of move with rate cuts through the second half of the year.”
There was some further relief for those wary of political influence on the Fed too. A U.S. Supreme Court ruling on a legal battle over Trump’s firing of two federal labor board members contained a line that raised the bar for any attempt to fire Fed Chair Jerome Powell at will.
“The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks,” a majority of justices said in the court’s ruling.
The Federal Reserve Act of 1913 that created the nation’s third and still existing central bank stipulates that Fed officials may be dismissed only “for cause,” not for political or policy disagreements.
There was also some better news on the economic front, with May U.S. business surveys coming in more upbeat than forecast and weekly jobless claims broadly stable.
But as U.S. Treasuries and stock futures held the line on Friday ahead of the long Memorial Day holiday weekend, the dollar continued to weaken – with the index slipping close to two-week lows.
The latest leg of the dollar decline was as much to do with developments overseas.
Germany updated its GDP readings for the first quarter to show an expansion twice that of original estimates, while British retail sales also beat forecasts for April.
With more hawkish noises from the Bank of England of late about further rate cuts in Britain, sterling led the advance of major currencies against the dollar and hit its highest since February 2022.
Japan’s core inflation, meantime, accelerated at its fastest annual pace in more than two years in April – raising the odds of another Bank of Japan interest rate hike by year-end.
BOJ Governor Kazuo Ueda said on Thursday the central bank will closely monitor market moves as yields on super-long Japanese government bonds reached record highs this week.
Weekend reads
* BRAIN DRAIN?: U.S. administration attacks on science in U.S. federal institutions and moves to defund some universities have raised speculation about researchers and academics moving overseas. Europe appears keen to attract them. Heather Grabbe and Daniel Gros at the Brussels-based think tank Bruegel propose a ‘Project Einstein’ initiative to mobilize European Union funds to attract U.S. scientific talent, pointing out that up to a fifth of researchers at top U.S. universities previously studied in Europe.
* STAR WARS: Trump’s Golden Dome missile defense concept revives a controversial, decades-old initiative that could upend norms in outer space and reshape relations between the world’s top space powers. Reuters correspondent Joey Roulette explains how the announcement of Golden Dome, a vast network of satellites and weapons in Earth’s orbit set to cost $175 billion, could escalate the militarization of space.
* REGLOBALISATION WITHOUT AMERICA?: In a critique of unfolding U.S. protectionism and how world leaders should respond, IMD Lausanne professor and CEPR’s VoxEU founder Richard Baldwin includes one low-probability but not impossible scenario – reglobalisation without America. “The US continues to wall itself off with high trade barriers and the world gets on without it” is how Baldwin describes one of three scenarios, adding: “The WTO evolves into a clearing house for cooperation on climate, digital trade and 21st-century challenges. Multilateralism survives, maybe even thrives.”
* BONDED WAREHOUSES: Companies importing goods into the United States from China are rushing to convert warehouses into facilities that are exempt from Trump’s tariffs until they are ready to sell the merchandise. Reuters’ Richa Naidu and Arriana McLymore report on how there are already more than 1,700 bonded warehouses: facilities where imported goods can be held without immediate payment of customs duties. Fees are only paid when the goods leave the warehouse, allowing businesses to manage funds effectively during trade war uncertainty.
* LASTING IMPACTS: The U.S. and global economies may well endure Washington’s tariff war without disaster, argues Nobel laureate and Stanford professor Michael Spence on Project Syndicate. But longer-term effects of the Trump administration’s other policies are likely to be more significant and far-reaching – and will ‘probably be only partly reversible’. “Whatever its flaws, the US was regarded for decades as a reliable global actor, whether in trade and finance or foreign policy and security. No more.”
* AI EMPIRE: Concentration of artificial intelligence infrastructure in a handful of Big Tech giants poses big challenges to consumer choice, innovation, resilience, security and financial stability, argue Bank for International Settlements economists Leonardo Gambacorta and Vatsala Shreeti. In a paper summarized on VoxEU, they say excessive Big Tech influence over AI development risks exacerbating inequalities, harming consumer welfare and creating systemic vulnerabilities.
* IMF MIA?: Rising global imbalances and inappropriate macro policies around the world led to this brewing global trade war and the International Monetary Fund has been ‘missing in action’ in demanding redress, argues Desmond Lachman at American Enterprise Institute in a column on Project Syndicate. “Globalization is in real danger of breaking down, and one of its premier institutions is nowhere to be found.”
* DURATION AND ORIGINAL SIN: Global mutual funds’ sensitivity to duration risk cuts across emerging market governments’ ability to borrow at long maturities in their own currencies, to an NBER paper by Hyun Song Shin at the BIS, Fed board economist Carol Bertaut and American University’s Valentina Bruno. “Even though emerging markets have largely overcome ‘Original Sin’ by issuing sovereign bonds in local currency, the portfolio holdings of global investors have ebbed.” Long maturities mitigate rollover risk for borrowers – but if investor reactions amplify market disruptions, long maturities may introduce new vulnerabilities affecting the availability and cost of finance.
* FLYING PIGS: Dr. Mike Lemmon’s pigs, each valued between $2,500 and $5,000, were supposed to be on a plane bound for Hangzhou from St. Louis in April to take up residence at Chinese hog farms. Instead, as Reuters Heather Schlitz relays in her report on the tariff hit to lucrative niche export markets, many went to a local Indiana slaughterhouse for less than $200 each after the Chinese buyer canceled the order within a week of Beijing’s retaliatory tariffs against the United States.
* COW BONDS: Sandra Palleiro traveled 600 km (370 miles) from Uruguay’s capital, Montevideo, to find 61 cattle she owns, at least on paper. But, like hundreds of other investors, she can’t find them. Reuters’ Lucinda Elliott reports on how the missing bovines were part of a “cow bond” scheme that collapsed, causing one of Uruguay’s biggest financial scandals.
Chart of the day
The German economy grew twice as fast in the first quarter as previously estimated, according to updated data on Friday. Quarter-on-quarter, the economy grew by 0.4% – putting the annualized expansion at more than 1.6%, its fastest in three years. By contrast, the U.S. contracted slightly – leading to a German outperformance for the first time since 2022. Both outcomes were heavily influenced by frontloading of imports to the United States ahead of expected tariff increases. While some of that may fade, the outlook for Germany received a significant boost from the new government’s plans for a trillion-euro fiscal boost and its lifting of the self-imposed ‘debt brake’ for the first time in 14 years. Financial markets have already rushed to reflect the changing fortunes. Germany’s main DAX equity index has risen 20% so far this year while Wall Street’s S&P500 is down 1% for the year to date.
Today’s events to watch
* U.S. April new home sales (1000 EDT); Mexico April trade balance (0800 EDT); Canada March retail sales (0830 EDT)
* Federal Reserve Board Governor Lisa Cook, St. Louis Fed President Alberto Musalem and Kansas City Fed President Jeffrey Schmid all speak; European Central Bank board member Isabel Schnabel speaks; Bank of England Chief Economist Huw Pill speaks
* U.S. corporate earnings: Workday
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Mike Dolan)
