Trump targets BLS and Fed
Unsurprisingly, Donald Trump was less than happy with the data release and responded by firing the head of the Bureau of Labour Statistics (BLS), claiming that the numbers had been manipulated for political purposes. The move raises further questions as to Trump’s overreach and attempts to influence independent organisations after repeated attacks on Fed chair Powell in a bid to get lower interest rates.
Trump escalated his Fed attacks later in August, announcing he would fire Fed governor Lisa Cook due to alleged mortgage fraud. Cook has refused to leave her position and is taking the fight to the courts in what could be a landmark ruling on the degree of influence the White House can exert over the central bank. Central bank independence has long been a cornerstone of stability for financial markets. Investors view a central bank that is able to set monetary policy solely in pursuit of its objectives — in the Fed’s case, to promote stable prices (IE controlled inflation) and maximum employment — as a major positive, and if this credibility is threatened by political influence, then they may demand some compensation. This could come in the form of higher bond yields, as investors want to be compensated for the increase in political risk.
ECB on hold
The European Central Bank (ECB) ended a year-long easing cycle in July and now appears set to be in wait-and-see mode. The impact of US tariffs on European growth and inflation is still difficult to accurately gauge and it appears that after lowering the overnight deposit rate to 2.0%, from 4.0% in June 2024, rate setters are looking for more information before further moves.
The Fed is expected to lower rates in September and should economic data deteriorate, then calls for a resumption of the ECB cutting cycle will likely grow. Inflation is currently under control, with the ECB forecasting 1.6% next year and 2% in 2027 but this could change when the full impact of tariffs feeds through.
Long-dated bonds in the headlines
The yield on UK 30-year government debt has reached its highest level since 1998, with long-term borrowing costs increasing due to economic outlook concerns, both domestically and overseas. The yield has moved up to 5.6% (yield moves inversely to price) comfortably above the 5.1% peak seen during the Liz Truss “mini-budget” fallout.
However, it should be noted that the speed of recent moves are far more controlled and measured than the sharp rise seen in October 2022. While gilts are making headlines, a peer comparison reveals that although markets may be concerned about the government’s spending and borrowing plans, these concerns are not unique to the UK. US, France and Japan have also seen yields rise on plans to increase fiscal deficits.
Summary
As we approach the three-quarter mark of the year it is easy to overlook that financial markets have still delivered positive returns despite a seemingly near-constant barrage of negative headlines. The MSCI All Country World Index is up 1.4% through the end of August, MSCI Europe ex UK up 11.5% and MSCI UK up by 10.3%. However, American stocks have fallen, largely due to adverse currency movements, with the MSCI North America down 1.5%. US investments would be in the same ballpark of returns as Europe had it not been for a 12.9% appreciation in the euro versus the dollar, through the end of August.
While the move higher in the euro this year has proven to be a headwind for investing in the US, the current exchange rate of US$1.17 is relatively high compared to recent history. In the last decade, the EUR/USD has ranged from US$0.95 towards the end of 2022 to US$1.26 in early 2018. We are now towards the upper reaches of this range and any move lower would mean that the headwind becomes a tailwind for owners of US assets.
Bond investors have also seen pretty much flat returns for 2025 through August, with slower central bank cuts than expected and growing concerns around fiscal policy pushing yields higher. We believe the level of yields on offer are more attractive than they were for much of the last 15 years, even though most European government bonds are yielding a fair bit less than US or UK equivalents.
Approver: Quilter Cheviot Limited, 4 September 2025
