TACO Trade vs. the Fed: What Markets Really Fear

Political risk is once again proving to be the wild card in global markets, capable of eclipsing data, earnings, and even central banks. A day that began with investor angst over European tech ended with Wall Street untangling a fresh thread in the long-running drama between Donald Trump and Jerome Powell.

Nothing stirs Wall Street quite like a fresh instalment of its favorite political drama. Yesterday, Bloomberg reported that Donald Trump was likely to sack Jerome Powell - a rumor that briefly sent US indices into a tailspin. But markets recovered after the President publicly dismissed the idea just hours later, allowing Wall Street to close in positive territory. Europe was less fortunate.

Europe's benchmark index, the EuroStoxx 50, ended the session with a decline of just over 1%, weighed down by a sharp fall in one of its heaviest constituents: ASML. The Dutch semiconductor giant spooked investors by admitting it could no longer guarantee growth in 2026. The market's verdict was swift — its shares plunged 11%.

Meanwhile, Wall Street had its own melodrama — centered on the spectre of Jerome Powell's dismissal. The threat has loomed for months, courtesy of Donald Trump. On Wednesday, Bloomberg reignited the firestorm, reporting that a White House source had confirmed Trump's intention to sack the Federal Reserve Chair. Markets shuddered: equities dipped, and long-term yields ticked upwards. But the panic was short-lived. Just hours later, the President declared such a move “highly unlikely”.

Despite the headlines, Powell's removal remains improbable. Such an act would constitute a political and financial shock of considerable magnitude. The market's precise reaction is unknowable — but likely to be turbulent, with equity indices falling and bond yields spiking. Few investors would relish the chance to “pay to find out”.

Rather than an outright dismissal, the more plausible strategy from the Trump camp is a campaign of sustained pressure. The goal? To compel Powell to step aside at the end of his term as Chair in May 2026. Crucially, he remains a Fed governor until January 2028. It is increasingly clear that the Trump administration would prefer not to have Powell pulling strings behind the scenes, even without the title.

Once this brief period of tension passed, US markets regained composure and ended the day in the green. The S&P 500 remains within touching distance — just 16 points — of last Thursday's record high. The Dow Jones climbed 0.53%, and the Nasdaq eked out a 0.1% gain.

Stepping back, the broader picture remains consistent: US indices are flirting with record highs, largely ignoring tariff threats and their potential consequences. While Trump may tout these market levels as vindication of his economic stewardship, investors appear to believe the threats are mostly rhetorical. The deadline of 1st August is widely expected to be deferred — as have all previous ones. In short, no one seriously expects the mooted tariff rates to be implemented. This market skepticism has become known as the “TACO trade” — Trump Always Chickens Out.

This week's inflation figures — CPI on Tuesday and PPI on Wednesday — offered the first concrete signs of tariff-related price pressures. While headline numbers were largely in line with expectations, or even slightly below, the granular details suggest early signs of inflationary impact. Most economists believe the bulk of the effects are yet to come.

Today's session will be shaped by US weekly jobless claims and retail sales figures. On the corporate front, earnings season picks up pace. TSMC reported second-quarter results this morning, while PepsiCo and Novartis are due later today. All eyes will be on Netflix, which is scheduled to report after the closing bell in New York. This morning, futures on Wall Street remained flat. I'm taking a well-earned break from this column for the next two weeks, but you’ll be in excellent hands. My colleague Grégoire will be stepping in, and I have no doubt you’ll enjoy his insights.

Today's economic highlights:

On today's agenda: adjusted trade balance figures in Japan and real export figures in Switzerland; in the United Kingdom, unemployment claims and the 3-month ILO unemployment rate; in the eurozone, CPI month-on-month and year-on-year; in the United States, new unemployment claims, Philadelphia Fed business outlook, advance retail sales month-on-month, business inventories, and the NAHB Housing Market Index. See the full calendar here.

• Dollar index: 98 712
• Gold: $3,325
• Crude Oil (BRENT): $68.47 (WTI) $65.40
• United States 10 years: 4.48%
• BITCOIN: $118,625

In corporate news:

• PepsiCo raised its annual profit outlook due to stronger demand for energy drinks and healthier sodas, aided by favorable forex trends, leading to a surprise Q2 revenue increase.
• Elevance cut its annual profit forecast significantly as high medical costs in government-backed health plans persist, sending shares down 7%.
• Anthropic, backed by Amazon.com, is attracting investor interest for a new funding round that could value the AI startup at over $100 billion.
• Coca-Cola will start using cane sugar in its U.S. Coke products, according to a statement by President Donald Trump.
• China is threatening to block a Panama ports deal involving BlackRock and MSC unless its shipping giant COSCO is included.
• Dow Jones Newswires, part of News Corp, launched an AI-powered French language service to translate up to 1,000 stories daily in real-time.
• Ocado aims to become cash-flow positive in fiscal 2025/26 after a 77% rise in H1 earnings and a 13% revenue increase, sending its shares up 13%.
• NATO and Germany are accelerating the transfer of Raytheon-built Patriot missile systems to Ukraine amid intensified Russian attacks.
• Johnson & Johnson strong financial results and raised 2025 forecasts boosted market sentiment.
• Meta shareholders filed lawsuits against CEO Mark Zuckerberg over data privacy mismanagement.
• TSMC Q2 profit surged to a historic high, despite US tariffs and a strong Taiwan dollar.

Analyst Recommendations:

• Affirm Holdings, Inc.: Deutsche Bank upgrades to buy from not rated with a target price of USD 78.
• Brixmor Property Group Inc.: Mizuho Securities upgrades to outperform from neutral with a target price of USD 29.
• Citigroup Inc.: DBS Bank upgrades to buy from hold with a price target raised from USD 70 to USD 100.
• Crown Holdings, Inc.: Baird downgrades to neutral from outperform with a target price of USD 105.
• Jpmorgan Chase & Co.: CTBC Securities Investment Service Co LTD upgrades to add from neutral with a price target raised from USD 230 to USD 323.
• Paypal Holdings, Inc.: Deutsche Bank initiates coverage with a hold rating and a target price of USD 75.
• Starbucks Corporation: Jefferies downgrades to underperform from hold with a target price of USD 76.
• Toast, Inc.: Deutsche Bank upgrades to buy from not rated with a target price of USD 54.
• Wells Fargo & Company: DBS Bank upgrades to buy from hold with a price target raised from USD 70 to USD 88.
• Api Group Corporation: Baird maintains its outperform recommendation and reduces the target price from USD 51 to USD 35.
• Curtiss-Wright Corporation: Morgan Stanley maintains its overweight recommendation and raises the target price from USD 405 to USD 550.
• Lululemon Athletica Inc.: HSBC maintains its buy recommendation with a price target reduced from 360 to USD 275.
• Mattel, Inc.: Morgan Stanley maintains its market weight recommendation and raises the target price from 17 to USD 21.
• Meta Platforms, Inc.: KeyBanc Capital Markets maintains its overweight recommendation and raises the target price from USD 655 to USD 800.
• Microsoft Corporation: Rothschild & Co Redburn maintains its buy recommendation and raises the target price from 450 to USD 550.
• Oracle Corporation: Cantor Fitzgerald maintains its overweight recommendation and raises the target price from USD 216 to USD 271.
• Ovintiv Inc.: National Bank Financial maintains its outperform recommendation with a price target raised from 56 to USD 68.
• Royal Caribbean Group: Wolfe Research maintains its outperform recommendation and raises the target price from USD 272 to USD 394.
• Rtx Corporation: Morgan Stanley maintains its overweight rating and raises the target price from USD 135 to USD 165.
• The Carlyle Group Inc.: Autonomous Research maintains its outperform recommendation and raises the target price from USD 49 to USD 60.
• The Timken Company: Loop Capital Markets maintains its hold recommendation and raises the target price from 65 to USD 83.
• Tpg Inc.: JP Morgan maintains its neutral recommendation and raises the target price from 46 to USD 56.
• Twilio Inc.: Morgan Stanley maintains its overweight rating and raises the target price from USD 117 to USD 152.