by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with President Trump’s recent visit to the Federal Reserve, a key event highlighting the ongoing tensions between the president and the Fed chair, which continue to influence market sentiment. We will also analyze other significant international and domestic developments impacting financial markets, including updates on trade policy and discussions concerning US economic health.

Powell Safe for Now: President Trump and Fed Chair Jerome Powell toured the renovations happening in the Federal Reserve Building. The project has faced sharp criticism after its costs exceeded the budget proposed in 2019. Though tensions have arisen between Powell and the president, particularly over revised estimates with Powell challenging Trump’s claim that costs were escalating further, the president concluded the visit by affirming that Powell would not be fired.

• Though speculation about Fed Chair Powell’s resignation due to perceived pressure has been widespread, we contend that this is not the most probable outcome. We surmise that a significant portion of the discourse surrounding Powell serves as a means for the presidency to create an uncomfortable environment for the incumbent Fed chair, particularly if a reduction in interest rates does not materialize in the foreseeable future.
• While we do not anticipate a rate cut at the Fed’s next meeting under our baseline scenario, we believe the committee could signal potential conditions for a September rate cut. This may reflect members’ growing inclination to reduce rates based primarily on inflation trends, even if labor market data shows signs of resilience. That said, we expect that the Fed could cut rates by as much as 75 bps by year’s end.

Economic Resilience: The June flash S&P Global PMI survey revealed that business activity expanded at a faster-than-expected pace. While the manufacturing PMI fell back into contraction territory (dropping from 52.0 to 49.5), the services sector, which accounts for roughly two-thirds of the economy, climbed to its highest level this year, rising from 52.9 to 55.2. A surge in business activity drove the rebound as firms hired more workers to address backlogs. However, the report indicated that the broader economic outlook remains subdued.

ECB Holds: The European Central Bank (ECB) opted to hold interest rates steady following Thursday’s policy meeting, citing the notable resilience of the eurozone’s economy. The decision appears partly driven by optimism that the US and EU will reach an agreement to avoid economically damaging tariffs. We also suspect that the ECB may be seeking to appease President Trump, who has repeatedly criticized foreign central banks for cutting rates while US rates remain relatively high.

Palestine Recognition: French President Emmanuel Macron has announced his intention to formally recognize Palestine as a state during September’s United Nations General Assembly. This decision has drawn sharp criticism from the United States, which strongly opposes the move, arguing it could legitimize Hamas propaganda. The announcement comes amid growing international unease over Israel’s military operations in the West Bank and risks the further diplomatic isolation of Israel.

Starmer Looks for Deals: UK Prime Minister Keir Starmer is expected to push President Trump to consider accepting more UK steel and Scottish whisky imports when the US president visits Scotland on Monday. While the existing US-UK trade agreement reduced tariffs for automakers and aerospace manufacturers, it excluded steel due to concerns about British supply chain reliability. These negotiations demonstrate how trade agreements can continue evolving even after their initial frameworks are established.

US-Japan Trade Arrangement: While both parties have acknowledged reaching a trade agreement in principle, there are still disagreements over specific terms. Japan’s chief negotiator clarified three key points: (1) the deal contains no provisions regarding defense purchases, (2) the reported 90-10 split favoring the US would fluctuate based on bilateral investment ratios, and (3) no fixed quotas were established. These discrepancies reveal deliberately broad language in the agreement that may lead to future interpretive disputes.

EU Digital Crackdown: Meta will no longer permit political advertising on its Facebook and Instagram platforms in the EU, citing what it describes as unworkable regulations under the bloc’s new Transparency and Targeting of Political Advertising rules set to take effect in October. This decision marks the latest flashpoint in ongoing tensions between US tech giants and EU regulators. The Trump administration has consistently sought to protect American technology companies from foreign regulatory measures, making this a key area of transatlantic contention.

Chinese Demographics: Kindergarten enrollment has declined by 25% over the past four years, reflecting the country’s deepening demographic challenges. This sharp decrease threatens to undermine population growth — a critical driver of economic expansion. This trend may exacerbate existing deflationary pressures as the nation continues to grapple with industrial overcapacity and weak consumer demand.

VW Seeks Deal: The carmaker hopes to secure a tariff exception by committing to increased investments within the US. This proposal comes after the company reported a substantial 1.3 billion EUR ($1.5 billion) hit to its bottom line in the first half of the year, directly attributed to a 25% tariff. If successful, this could pave the way for other companies to pursue similar deals with the US, especially if their home countries can’t secure favorable trade arrangements.

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