Weekly market update: Bond markets seem calm as US presidential administration steps up efforts to control US Fed
This has been another week dominated by the US president's political moves as he encouraged protests in Iran and threatened a military response to violent government suppression. The president threatened higher tariffs on countries which do business with Iran. His administration has also opened a criminal investigation into Federal Reserve chair Jerome Powell. The investigation has been rightly condemned as politically-driven interference but concerns about central bank independence added to the recent rally in gold.
The US president's short-term agenda raises significant risks for the US. The recent trade data from China shows there is plenty of potential for unintended consequences over the long-term. China’s trade surplus increased in 2025, not just despite US trade restrictions, but because of them, as China and other US trade partners were forced to look for new markets. As many commentators have warned, the loss of US central bank independence significantly increases the risk of inflation in the future. Bond markets have been calm but some institutional investors are starting to take US political risk more seriously and markets are unlikely to be as relaxed if the president's attempts to control the Fed appear to be succeeding.
US: attacks on Fed independence spark concern
Global markets have been getting to grips with the US president's latest attempts to drive down interest rates. Fed chair Jerome Powell revealed that he is under criminal investigation by the Department of Justice over whether he misled Congress. The chair of the Federal Reserve rejected the investigation as an attempt to influence the bank’s decisions and the last three Fed chairs and leaders of most major central banks condemned the attempt to erode the independence of the US central bank.
Although lower rates would be good for US bonds and equities, in the short-term global markets saw little movement, however, the price of gold increased further. JP Morgan CEO Jamie Dimon warned of the risk of inflation spiking in future if the Fed loses its independence. The latest data from the US shows headline price inflation holding steady as CPI remained at 2.7%, although the Producer Price Index shows input costs for businesses are rising faster.
JAPAN: Takaichi trade sends stocks higher and yen lower
Markets revived the “Takaichi trade” as investors priced in a snap election and a pro‑growth tilt as the Nikkei 225 Index set a record, rising 4.3%, and broad Topix Index gained 4.6%. Technology, defence and basic materials saw the largest gains due to expectations of further fiscal stimulus. The potential for slower interest rate hikes caused the yen fell to around 159 per US dollar, its weakest since July 2024. The potential for more government borrowing caused Japanese government bonds to fall. Bond yields move inversely to bond prices and the move pushed the yield on 10-year government bonds to 2.19% (the highest since 1999).
The prime minister is expected to dissolve the lower house as soon as parliament is in session and call a February election. Takaichi is attempting to cash in her popularity as she enjoys approval ratings as high as 76% even as her Liberal Democratic Party’s support hovers near 35%, making an early vote a calculated risk after the ruling party recently lost majorities in both houses of parliament. Currency risk remains elevated as the government has previously expressed concern about yen weakness, and intervention is seen as likely if the dollar exchange rate falls below ¥160.
CHINA: surplus grows as exports are diverted from US
China’s trade surplus hit a record $1.2tn in 2025 as December exports rose 6.6% year on year and imports climbed 5.7%. Total Chinese exports in 2025 are up 5.5%. Following a year of trade disputes with the US, Chinese trade has pivoted from the US toward other markets. Shipments to America fell 20%, cutting the US share of China’s exports to 11.1% from 14.7% in 2024. Exports to the EU rose 8.4% and exports to south east Asia are up 13.4%. Beijing also leaned on strategic materials as rare‑earth exports reached the highest level since at least 2014.
The rerouting of Chinese raises trade policy frictions, especially in Europe. The EU has pressed Beijing to spur domestic demand and open its markets. Beijing attributes the imbalance partly to US tech export curbs, while Trump’s renewed tariff threats (up to 145%) and a one-year truce after an October summit keep uncertainty elevated. The record surplus shows China’s export strength but also highlights its reliance on external demand amid weak consumption and a prolonged property slump.
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