The Summer That Will Be 2025

“Maximum warfare, everywhere, all the time”. This is how a member of the Trump administration has described their political strategy to the New York Times. Just because it’s the summer doesn’t mean the momentum will ease. If anything, a reality TV star President entering his ninth decade with a year until the mid term elections will relish several weeks where he can further dominate the media cycle. 

For financial markets, the focus will be on the kerfuffle over data and the changing of the guard at the Fed. They are intimately linked. The topic for this year’s Jackson Hole jamboree, which begins on Thursday 21st August, is “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy“. This is the first time in eleven years that the labour market has warranted explicit reference in the theme of the J-Hole; last time, in 2014, was Yellen’s first as Fed Chair. Just as she was happy to pivot the Fed into her personal specialism of labour markets, Powell wants to return to the topic for his last Jackson Hole in charge. He managed to use a paper at last year’s symposium to provide ballast for the first interest rate reduction since 2020 – Gautti Eggertsson’s work on the Phillips curve shift past the Beveridge threshold provided a literal pivot point where the balance of risks switches. As we noted at the time “The Fed need not have feared people losing jobs when they hiked rates, because there were so many vacancies – but if vacancies have now fallen then there is a greater risk of job losses if they don’t cut rates”. A month later, seven weeks before the US election, the Fed kicked off rate cuts with a 50bp reduction, followed by 25bp more in November and December. Since Trump’s inauguration, nothing.

And now, following huge revisions lower to the non farm payrolls numbers, and the Fed returning specifically to the topic of the jobs market, the stars would seem to be aligning for Powell to deliver the rate cut Trump has been calling for. Oh Jerome. If this is all just a political game, you are going to be “Too Late”. As Trump said on the day of the July FOMC meeting, “I hear they’re going to do it in September. For what reason? Nobody knows“. Donald does not have time for this. So, out goes the Bureau of Labor Statistics commissioner. Trump doesn’t care about any criticism from his own party that this undermines trust in the statistics, or that it is, as Wyoming Republican Senator Lummis put it, “kind of impetuous”. 

Remember: “maximum warfare, everywhere, all the time”. And the date of the next battle has just been set. Fed Governor Adriana Kugler announced her resignation just two hours after the payrolls data came out, effective 8th August 2025. With the Senate in summer recess (although delayed by a couple of days after Trump demanded his nominees “should NOT BE FORCED TO WAIT” for confirmation), the President could make a temporary recess appointment without needing to have Senate approval. The Supreme Court made a ruling in 2014 over what constitutes a recess appointment, narrowing the parameters. But it can be done. None other than former Fed Chair Marriner Eccles was appointed during recess by FDR in 1934. Trump could easily install his choice for the post-Powell chair as Kugler’s replacement. The timing would seem to rule out Bessent for the job, given section 242 of the US Code prohibits the Fed Chair from holding other roles in government. Former Fed Governor Kevin Warsh is in pole position to return to the Fed, not least given his father-in-law Ron Lauder is a good friend and donor to Trump (including making the suggestion that the Donald should go for Greenland). Either way, the Powell Fed is over and the Trump Fed begins. The first two-Governor dissent since 1993 was just the start. 

The US data is therefore somewhat extraneous to the direction of interest rates. In any case the data has been a poor indicator of both the economy and monetary policymakers ever since the pandemic. The last five years can be summed up as two phases: panic and cut rates due to plague, followed by panic and raise rates due to war. Meanwhile the real economy is being shaped by technological revolution, an aging population and indebted governments. Scarcity of resources is leading to the reimposition of physical borders just as technology leaks intangible ideas across the globe. This is not a world where a basis point on unemployment or inflation makes the marginal difference. 

The data itself is from a bygone era. The US BLS still unfathomably releases data as if it were on a Telex machine, their survey response rate has yet to recover after plunging below half during the pandemic, and they have failed three times in the past 18 months to publish the data on time to everyone at the same time.

This is not just a US problem. The UK Statistics Agency only has an acting head after the National Statistician resigned; the April CPI release was wrong by 0.1 pct pts after the government provided the ONS with the wrong number of cars subject to vehicle excise duty; and the UK hasn’t had a reliable labour force survey since it was withdrawn in October 2023 and its replacement might not be ready until 2027. It is long overdue for a shake up of the numbers upon which financial markets place such veneration. 

Particularly when numbers are of less importance to economies than the bloody guts of politics. One number upon which there should be a great deal of focus this summer is the UK Public Sector Net Borrowing Requirement, due Thursday 21st August. The UK Chancellor is acutely aware that the OBR’s numbers are simply a snapshot whereas the dirty reality of government ticks over day by day. Borrowing has continued to edge above expectations as inflation both raises tax receipts but also government spending. Running with such a fine margin of fiscal headroom means that every extra £1 above the OBR’s forecasts takes the Chancellor further away from her claustrophobic fiscal rules. 

The Gilt market is so far giving her the benefit of the doubt, assuming all gaps will be plugged with tax hikes at the Autumn Budget. The date for this had already been published by this time last year; the fact we haven’t yet had the 2025 announcement means the Chancellor is trying to buy some time to improve the figures ahead of the OBR’s forecast process. Last year the OBR’s timetable used market prices from the 10 working days to 12 September. Someone call No11 with a UK swaps calendar spread. After all, the Treasury only have a handful of Bloomberg terminals to check the price. The Chief Secretary to the Treasury said he couldn’t afford one. 

Perhaps that’s just as well. There are four Gilt auctions over the next five weeks. Absent any market or political volatility these should pass without incident, but there are warning signs contained in the latest Gilt-Edged Market Maker Guidance from the DMO. They have created a new tier of GEMM, “Associate”, who miss out on the perks of being a Wholesale GEMM (such as fees from syndication) but in return do not have to sign up to the rules on market participation, such as committing to 5% of bids at auctions on average over 6 months and buying 2% of all issuances. Toronto Dominion and Bank of Montreal are the only Associate GEMMs for now – but the latter only became a Wholesale GEMM eighteen months ago. Are these banks quietly exiting the market, potentially diminishing liquidity? We will find out. 

The Bank of England can inject some liquidity by reducing interest rates on Thursday 7th August. They will cut 25bp, with Alan Taylor and Swati Dhingra voting for a 50bp in an ongoing attempt to drag the median MPC member in a more dovish direction. The accompanying quarterly Monetary Policy Report will allow for more dovishness and Governor Bailey can ram the message home at the press conference. Expect a nod towards QT being reduced from September. 

Earnings season is coming to a close but not before the big one reports: Nvidia earnings are due on Wednesday 27th August. Given some volatility in the wake of the other recent MAG7 earnings reports, this one could provide the close of summer, low-volatility, kicker. 

And finally… Summertime listening:

– How did Greece go from economic zero to hero?

• Listen to or watch our BM Talks podcast with Alex Patelis, former Chief Economic Adviser to the Greek Prime Minister.

– What is Trumponomics?

• Listen to Bloomberg’s Odd Lots podcast with Chair of the US Council of Economic Advisers, Stephen Miran.

– What are the risks of a UK fiscal crisis?

• Watch Helen Thomas talk to Jasmine Birtles on the MoneyMagpie podcast.

– What mark would you give Trump out of ten?

• Listen to Pippa Malmgren and Helen Thomas give their scores to Merryn Somerset Webb on the Merryn Talks Money podcast.

– What’s the BlondeMoney origin story??

• Listen to Helen Thomas (again) talk to Bilal Hafeez on the Macro Hive podcast.