Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street tumbled and Treasury yields rose on Thursday as expectations of a Federal Reserve interest rate cut next month faded rapidly, while the dollar also fell in a bleak session for U.S. asset prices.

More on that below. In my column today I look at the emerging parallels between the US and Japan, and how both countries are deploying a rather unorthodox policy tool in the broader fight to mitigate sticky inflation - fiscal stimulus. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* December Fed cut now only 50-50

A Fed rate cut in December, which was a 90% certainty only a couple of weeks ago according to rates futures markets, is now a coin flip. The rapid shift in market expectations is such that the next fully-priced rate cut isn't until March.

Very broadly speaking, a split appears to be forming between Fed governors and regional bank presidents: governors, nominated by the President, are leaning dovish; regional bank presidents, less so. Since 1990, the most dissents at a Fed policy meeting have been four. Chair Jerome Powell will earn his leadership spurs next month.   

* Short goodbye from the Big Short

Michael Burry, the 'Big Short' investor who made his fame and fortune betting against the U.S. housing market in the mid-2000s, is closing his hedge fund. On Wednesday he posted on X that he has bet $9.2 million shorting Palantir stock, although it's unclear if that position is still open.

There's an interesting debate around long-term 'shorts'. Market dynamics, structure, and liquidity are very different from 20 years ago. The 'buy the dip' mentality, built on an expected Fed backstop, is such that investors need bags of nerves, patience and deep pockets like never before.    

* The limits of long bond demand

Appetite for U.S. Treasuries this year has been remarkably strong. Just look at where yields are today compared with where they were on January 1 - even the yield on the much-maligned 30-year bond is lower year-to-date. 

But auctions of 10- and 30-year debt this week have been met with pretty weak demand. Perhaps yields have fallen too far, and investors are now requiring more compensation for holding longer-dated debt given how sticky inflation is looking. 

The United States and Japan are both employing a novel inflation-fighting tool: fiscal stimulus. 

U.S. President Donald Trump and Japan's Prime Minister Sanae Takaichi are looking to placate angry electorates squeezed by cost-of-living issues. But offering lavish fiscal giveaways to cool inflation is a bit like trying to bring a breaking fire under control by dousing it with gasoline.

Earlier this month, Trump's Republican Party suffered key gubernatorial and mayoral election defeats, where concerns about the high cost of living played a major role.

The White House appears to have heard the electorate loud and clear. The president now seems set on sending a $2,000 check to most U.S. households, a 'tariff dividend' funded via money raised by the cranked-up duties on U.S. imports.

"It's in discussion," Treasury Secretary Scott Bessent said on Wednesday. 

But wait, weren't the hundreds of billions of dollars of tariff revenues meant to help cut the budget deficit? 

Evidently, that's no longer the priority, something that became clear earlier this year when Trump pushed through his 'One Big Beautiful Bill Act'. The package is jammed full of tax cuts that are expected to add $2.4 trillion to the federal budget deficit over the next decade, according to the non-partisan Congressional Budget Office.

The Trump administration's key priority is clearly growth, meaning it will run the economy hot, even if the price for that is above-target inflation. While White House officials have never said this publicly, they appear to accept that having inflation closer to 3% than the Fed's 2% target may be worth it to prop up nominal growth.