China sales doubt blurs Nvidia beat

The world needs to brace itself. U.S. dollar losses on an unraveling of Federal Reserve independence may not simply be the fallout, it's likely the intention.

Donald Trump's daily bashing of the U.S. central bank this year has left little doubt that he intends to exert greater political influence over the Fed than any president since the 1970s. 

His legally contentious move to fire Lisa Cook from the Fed board over allegations of mortgage fraud - based on loans taken out before she even joined the Fed - has been read by most people as a pretty clear attempt to create another vacancy on a seven-person board where members have long 14-year tenures.

If successful in dismissing Cook, Trump would secure a majority of apparent loyalists on the board next year - two are already in place, another position is in the process of being filled by his economics advisor Stephen Miran, and then there's the replacement for brow-beaten Chair Jerome Powell, whose seat is up for grabs in May. 

Not only is Trump filling the board with like-thinking economists, but there are reports he is also seeking ways to shape the re-appointment of regional Fed bosses who make up the rest of the monetary policymaking council. These 12 Fed Presidents serve rolling five-year terms but all 12 come up for reappointment in February and the Fed board needs to approve them.

What does Trump want to do with the Fed? One of the president's publicly stated aims is getting interest rates down more than three percentage points to 1% - a move that would likely have a pretty dramatic downward impact on the dollar if even halfway successful.

But it's widely accepted the administration wants what it sees as a still over-valued dollar to depreciate further to help rein in U.S. deficits and reinvigorate U.S. industry - something Miran has written about extensively and Trump has publicly sympathized with. 

It's likely a feature rather than a bug of its re-politicizing of the central bank. 

Graphics are produced by Reuters.

In a note to clients on Tuesday, strategists at Jefferies said the Cook dispute "exemplifies the expansion of executive power," which may open the path for the administration to oust Powell or other regional Fed presidents, raising risk for U.S. assets.

"The risk of non-renewal or dismissal of regional presidents — especially those perceived as policy dissenters — has become material," the analysts explained. They argued that "this emerging dynamic" was underscored when standing Trump board appointees Michelle Bowman and Christopher Waller abstained in the vote to appoint former Barack Obama adviser Austan Goolsbee to run the Chicago Fed back in 2023.

Echoing many investors, Jefferies noted that markets have remained calm despite the unprecedented public political interference in the workings of the Fed. But they also pointed out that the sustained political pressure could erode confidence in its independence over time, potentially leading to higher inflation expectations and upward pressure on yields.

The steepening of the 2-to-30-year yield curve is already well underway, hitting its most extreme level since early 2022 as markets price in sharp cuts over the next year and rising long-term inflation expectations.

Arguably, that's the worst possible mix for the greenback, which has already lost almost 10% this year against a basket of currencies, as the steepening yield curve reduces both short-term yields and long-term purchasing power.

Graphics are produced by Reuters.

Nvidia's stellar earnings beats are almost inevitably becoming less meaty. The chipmaker expects revenue of $54 billion, plus or minus 2%, in the third quarter, compared with average estimates of $53.14 billion. But its fiscal second-quarter results came up short of some analyst expectations in its important data center segment, with some analysts suggesting cloud computing providers may be more cautious about spending.

Nvidia also said it has not assumed any shipments of its H20 chips to China in its outlook, despite having earlier this month received some licenses to sell them. If geopolitical issues subside and it gets more orders, Nvidia said it could add $2 billion to $5 billion in H20 revenue in the third quarter. The overall picture sent its shares down 2-3% in after-hours trading, clipping about $110 billion from Nvidia's unrivalled $4.4 trillion market capitalization.    

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