This is a huge week for US macro data: The critical ones are CPI and PPI

This is a huge week for US macro data, including industrial production, retail sales, and import prices—but the critical ones are CPI and PPI. Both are already rear-view but inflation will get a second look.

Where’s the tariff effect? See the chart from the BEA. CPI was 2.4% y/y in May. It might surprise to the upside, but it’s probably too early. We chose food and medical care services but you an add or subtract sectors as you wish.

The correlation of the 10-year with the dollar index is a long-standing benchmark that goes awry from time to time. Recently we are seeing its resurgence, which may account for the dollar index on the rise, otherwise inexplicable. It probably helps that the recent note and bond auctions have seen strong demand for US paper, countering the theme these days that foreigners really want to get out of anything on which Trump can wreak havoc. As we see over and over again, the dreadful budget that will raise the deficit ran into the shortage of alternatives to US paper, and the vast pile of available US investments won again over the skimpy offerings from everywhere else. Trump gets no credit for this.

Then there is the idea that the US economy and its financial markets are so big, resilient  and varied that not even Trump’s stupidity can bring them down, or at least not down enough to bother the bond market all that much. 

We may not expect to see the economy suffocate on tariffs and other bad policies, but the day may come when growth stagnates. One effect we must expect with confidence is that higher debt and deficits translate into higher long-term interest rates when growth falters. We may say “No, kidding” but this is the deduction of an IMF study just published. The data sample base was 50 years (1976-2025).

“All else being equal, long-term rates rise by 20 to 30 basis points in response to a 1 percentage point increase in the projected deficit-to-GDP ratio, and by the same amount in response to a 10 percentage points increase in the projected debt-to-GDP ratio.” If you like to wallow in formulas, you can find the paper by Googling ”imf/wp/25/142.”

We looked for 2026 GDP growth rates and found 1.5%, 1.6%, 1.7%, 1.8% and 2.0% (Trading Economics).

Off on the side but about to take center-stage any minute is what the WSJ calls the “shadow Fed chief.” This is Trump naming Powell’s replacement nearly a year in advance to get an alternative narrative going. Trump is not getting traction from purported cost overruns at the Fed and Powell purportedly lying about it to Congress, so the shadow Fed chief is next. Shadow roles are common in the UK (shadow Chancellor, etc.) but new in the US. As noted before, this is expected to damage the Fed’s credibility as an non-political entity. But maybe Wall Street will take it in stride, as they have done in the UK.

Bloomberg’s Authers says no, the bond and FX markets would indeed respond and in a big way. One analyst suggests the dollar index would fall at least 3-4% in the first 24 hours.  The long Treasury yields would rise 30-40 bp — “a combination usually seen in emerging market crises, and similar to April’s response to Liberation Day…. The 10-year yield would come back to challenge its 2023 high, while the dollar would drop to a four-year low.”

More: “Ten-year yields back close to 5% are exactly what the administration doesn’t want, but exactly what it would deserve for a naked politicization of its central bank. Equities could be different. Longer yields would rise, but shorter term rates would fall with a new dove at the Fed. That should help equities in the short run.”

Authers concludes: “There are further issues. Powell might resign as chairman but maintain his seat as governor for another two years. The Fed’s regional governors might take a strong line against any new attempt at dovishness. All of them have voted in line with Powell over the last year, and their response could be critical. 

“This remains a dumb risk that doesn’t need to be taken. Powell oversaw a terrible policy mistake in 2021, but at present he’s presiding over declining inflation and low unemployment. There’s little upside to getting rid of him, while the downside is cavernous. Investors can see this, which is presumably why this extreme risk isn’t being priced, but it’s not clear the president does.” 

The US is not the only country with critical data. Tomorrow we get the eurozone industrial production and Germany, ZEW, while the UK reports CPI (Wednesday) and labor market conditions (Thursday). While US data rules the roost, the UK data could deliver an antidote to the dreadful GDP last week that took the pound down to the lowest since June 22 (and well over the 62% retracement starting there). Note that Canada reports CPI tomorrow, too.

Important Theme: Nobel Prize economist Krugman has let loose the dogs of war now that he publishes on Substack instead of the crusty New York Times. Here is part of his diatribe on Friday: “Jerome Powell’s term as chairman of the Federal Reserve Board will end in May 2026. We don’t know who Donald Trump will choose to replace him, but we already know that his successor will be a disaster.

“How can I say that without knowing who will get the nod? By invoking Bessent’s Law.

“Let me explain. What Trump looks for in his personnel choices is, above all, groveling loyalty. So anyone he chooses will, more or less by definition, be a spineless toady. Even if the appointee looks qualified for the position, we can be sure that he or she will indulge and cheer on every Trump idea, no matter how bad. If they weren’t that kind of person, Trump wouldn’t have chosen them. At this point the mere fact that someone is willing to work for Trump, knowing who he is, tells you that they’re willing to debase themselves.

“I call this Bessent’s Law because when Trump chose Scott Bessent as Treasury secretary a number of Wall Street people assured us that he was a good, competent choice, someone who would promote sensible policies. But Trump knew his man. In office, Bessent has enthusiastically backed every bit of Trumpian nonsense: Tax cuts pay for themselves, critics of Trump’s trade policy are suffering from “tariff derangement syndrome,” a trillion-dollar reduction in Medicaid isn’t really a benefits cut. Oh, and anyone doing serious analysis of Trump’s policies is just an angry partisan.

“So it doesn’t really matter whether the next Fed chair is Kevin Warsh, Kevin Hassett, Larry Kudlow or the My Pillow guy. For practical purposes Trump will be running the Fed.”

Krugman goes on to describe the Fed’s mandates. He also has a chart of the inflation rate for Turkey. “You don’t want interest rates set by politicians who don’t know the facts, don’t understand the issues, and want the political benefits of low rates.

“And you really, really don’t want someone like Donald Trump controlling monetary policy.”

Forecast

The stock market thinks Trump will retreat from horrendous tariffs, so is not responding to the danger. Trump misinterprets this as approval or at least indifference. But as Aug 1 comes nearer and Trump does not chicken out, we have to expect a big equity market downturn is forming for Aug 2. Meanwhile, US yields keep rising, which is dollar supportive until it stops being supportive and becomes a needed offset to the loss of extraordinary privilege.

At the same time in the next two weeks, Trump is likely to name his shadow Fed chief. As noted above, some analysts expect the story to trash the dollar and push yields even higher. High yields normally lift the dollar, and may do so again, as we see now, but there comes a time when high yields show the well is poisoned. As we wrote several weeks ago, the classic case of a politicized central bank is Turkey, and the current yield on Turkey's 10-year government bond is 29.69% (up by 3.59% over the past week), while the lira has been falling for months. See the chart.

It's not silly to forecast this outcome for the US, if to a lesser degree.

Tidbit: Vanity Fair magazine features an article on Trump titled “The Godfather Presidency” that strikes home and recounts historical events and relationships making the comparison more than a metaphor. Trump really did know and associate with mobsters, ad did his father, and has copied many of their attitudes and tactics. The Qatari “aeronautical pimpmobile” is in keeping, as are fake emergencies allowing unconventional and normally illegal actions. The scariest thing—Trump wants “one big violent day,” which the author likens to Kristallnacht. The writer points out that plenty of other leaders, including FDR and Kennedy, associated with mobsters.

Tidbit: Trump wants to strip Rosie “Donnell of American citizenship. He can’t. She was born in the US and was granted citizenship at birth by the 14th Amendment. Trump wants to de-naturalize some citizens who turned out to be criminals and that can be done, and the Supreme Court has ruled that the 14th Amendment can be interpreted state-by-state.

That’s something sure to be overturned some day, like the dead-wrong Supreme Court decision that put Japanese citizens in concentration camps during WW II.

Here's the AI story from the Washington Post: “In 2018, Chief Justice John G. Roberts Jr. explicitly overruled Korematsu v. United States, stating it ‘was gravely wrong the day it was decided’ and ‘has no place in law under the Constitution.’ This statement was made while upholding President Trump's travel ban, which some compared to the internment of Japanese Americans during World War II. The Korematsu decision had previously been widely criticized for its racist and unjust implications. In 1983, a federal court vacated Fred Korematsu's criminal conviction, and in 1988, Congress officially apologized for the injustice and paid reparations to those affected.”

It was, of course, too little and too late. Just about all the falsely imprisoned lost all their worldly property and goods. 

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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