Weekly Comment: A rare sighting of the lesser-spotted adult in the room

Market overview

Not even halfway into Donald Trump’s second term as US president and it is not hard to argue that his second stint is proving to be more controversial than his first. Where to start? Tariffs? Iran war? The White House ballroom? Now there is a view that one explanation for this uptick in controversiality lies in the make-up of the team the president has around him. It is widely believed that during the first administration, top advisers regularly reined Trump in. So much so, the advisers were collectively known as ‘the adults in the room’. Second time round and the sense is the president has surrounded himself with advisers more inclined to praise rather than restrain him— remember Treasury Secretary Scott Bessent telling Trump “you have saved this country”; or his peace envoy Steve Witkoff declaring Trump to be “the single finest candidate” ever for the Nobel Peace Prize?

Yes or no man?

For a while, it seemed Trump’s pick for Federal Reserve (Fed) Chair, Kevin Warsh, would fit the mould of yes man. After all, Trump interviewed Warsh for the job and presumably put him forward on the grounds that his man would deliver the rate cuts he craves. And yet, less than six months into the job and Warsh has delivered...the first rate hike for three years. The federal funds target rate was increased by 25 basis points to a range of 3.75% to 4.00%. After a run of strong inflation data, the decision had been widely expected (although questions remained over whether a hike would be forthcoming).

What perhaps was a surprise was the unanimous support the decision received from members of the rate-setting committee (12 for/zero against). Such strong support for a hike gave Warsh an ‘out’. He could have voted against raising rates in the knowledge that the majority of the committee would vote for one. This could have provided a degree of cover from whatever Trump might have hurled the Fed’s way in response to the rate rise. But he chose not to and voted to raise rates. Is Warsh, an example of the lesser-spotted adult in the room?

It is of course possible that Warsh, in keeping with the ‘yes man’ accusations, was merely following Trump’s orders. How so? Because following the rate decision, true to form Trump said "interest rates are too high. They're not appropriate...” The president went on to say, “I talked to Kevin and I said, 'you might as well vote with the board because it's not going to matter.' The board is very hostile, they're very political." So, did Warsh follow the president’s advice? The jury it would seem is still out on whether the Fed chair is the president’s man.

The 11 adults

But does it matter if he is? Because, for now at least, there appears to be 11 adults in the room, and they are all sitting on the Fed rate-setting committee. Much has been written about the threat to the US central bank’s independence and credibility in recent months. And yet, one way or another, last week’s rate decision goes some way to showing that the lesser-spotted adults in the room are alive and well, at least they are in the Fed.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week 0.5% lower (+13.6% YTD).

United States:

US stocks outperformed the global benchmark, finishing the week down just 0.1% (+12.7% YTD). A decent outcome given the Fed rate rise, oil prices surging above US$100 per barrel due to a re-escalation in hostilities in the Middle East and, if that was not enough, growing calls for a slowdown in the artificial intelligence (AI) arms race amid safety concerns.  Large-cap growth stocks (+0.9%) outperformed value (-1.1%). YTD though value (+21.2%) remains well ahead of growth (+4.7%). Small caps had another tough week, ending the week down 1.5% (+16.4% YTD).

US Treasury yields continued their upwards march as rising oil prices fed the higher-for-longer inflation/interest rate narrative. The 10-year Treasury yield rose a relatively modest three basis points to 5.00% (up 83 basis points YTD) compared to the 2-year Treasury yield, which increased 12 basis points to 4.75% (up 127 basis points YTD).

United Kingdom:

Not for the first time this year, UK equities bucked the global trend to finish the week in positive territory: large caps edged up 0.1% (+10.1% YTD); while mid-caps were 1% higher (+10.4% YTD). Sterling didn’t fare so well, ending the week at US$1.34 compared to US$1.35 previously.

UK gilt yields also went against the global grain to finish the week lower. The yield on the 10-year gilt fell five basis points to 5.29% (up 82 basis points YTD). The Bank of England (BoE) holding rates at 3.75% may have helped here. The decision places the UK as something of an outlier compared to other G7 countries.  As well as the Fed, the Bank of Japan also voted for a 25-basis point rate hike to 1.25%, while the European Central Bank has already raised rates twice this year. With three members of the BoE rate-setting committee voting for an immediate increase and the central bank warning that rates may need to rise if the energy price shock triggers sustained inflationary pressures, the days of the BoE being an outlier could be numbered.

Europe ex UK:

The MSCI Europe ex-UK Index was the week’s underperformer, ending the week down 0.8% (+8.9% YTD) as rising oil and natural gas prices continued to weigh on sentiment. At the national level, Germany’s main market retreated 1.0% (+3.3% YTD); while France’s finished 1.4% lower (+1.5% YTD), and Italy’s ended down 1.8% (+18.2% YTD). Switzerland by contrast tacked on 0.2% (+7.1% YTD). Like sterling, the euro was on the backfoot at US$1.15 compared to US$1.16 previously. The 10-year German bund yield was relatively stable, rising just two basis points to 3.52% (up 66 basis points YTD).

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