Investors seemingly changed their mind over the weekend about the latter, which recovered most of Friday's losses in thin trading during the London bank holiday on Monday. Stocks did better and held onto their gains, while long term bonds are now focused on this week's inflation data out of the US. More generally, concerns about a possible loss of the Fed’s independence, and general institutional degradation, are balanced out by the prospects of earlier and more generous monetary stimulus than was priced in just a week ago. Data worldwide has been giving off increasingly stagflationary vibes for some time. Slowing job creation, weaker growth and stubbornly high inflation are creating difficulties for the Federal Reserve.
In parallel, political pressure from Trump on the institution grows. Last week, he targeted another Fed governor Lisa Cook, accusing her of mortgage fraud and threatening to fire her if she did not resign. Developments on this front may be as important as the key US data points on tap this week. These include second quarter GDP revisions on Thursday and PCE inflation for July on Friday.
A data-light week was dominated by Fed chair Powell's speech at the annual Jackson Hole conference of central bankers on Friday. The emphasis here was more on potential weakness in the labour market rather than on the recent rebound in inflation further away from the central bank's targets, which the Fed expects to be temporary. While the shift in tone could be justified by recent data, it still leaves open the question of whether the institution is starting to buckle under the relentless political pressure coming from the Trump White House.
Markets seem to share our doubts in this regard, as the initial euphoria after the publication of the speech seems to have mostly faded away over the weekend. This week's PCE inflation report will be key, as any upward surprise would bring serious questions on the reasons for the Fed's dovish shift.
