ORLANDO, Florida, Aug 25 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Investors on Monday wound back some of Friday's sharp market

swings sparked by Fed Chair Jerome Powell's dovish pivot, a

reversal that saw the dollar spike higher, Wall Street close

lower and the U.S. yield curve flatten.

More on that below. In my column today, I look at Powell's

Jackson Hole speech on Friday, and argue that his opening the

door to a rate cut next month is not a sign that he caved to

political pressure from U.S. President Donald Trump.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. World's central bankers fear being caught in

Fed's storm

2. Wall Street ramps up bets on September rate cut

after

Powell's dovish tone

3. Powell fires up markets, but some investors see

reason

for caution

4. Keurig Dr Pepper takes a shot at Nestle with $18

billion

takeover of Dutch coffee giant JDE Peet's

5. Wall Street hires more senior bankers as growing

confidence spurs deal rebound

Today's Key Market Moves

* STOCKS: Chinese stocks hit a 10-year high. Wall

Street

ends in the red, led by the Dow's 0.8% slide.

* SHARES/SECTORS: Nine of the 11 S&P 500 sectors

fall,

utilities down 1.6%, health down 1.4%. Keurig Dr Pepper shares

slump 11.5% on its $18 billion takeover of JDE Peet's. S&P puts

firm on negative credit watch.

* FX: Dollar index +0.8%, its best day this month,

recovering some of Friday's steep decline.

* BONDS: 30-year JGB yield up for eighth day in a

row to

new high of 3.215%. U.S. 2-year yield up 4 bps, curve bear

flattens.

* COMMODITIES: Oil spikes nearly 2% to a two-week

high.

Brent crude pierces $69/bbl, WTI back up to $65/bbl.

Today's Talking Points:

* China stock boom

China's equity whoosh accelerated on Monday, with benchmark

indexes climbing another 2%. The blue-chip CSI 300 index is at a

four-year peak, and the Shanghai Composite index is now the

highest in over a decade.

Hong Kong's benchmark indexes are joining the party too -

the Hang Seng hit a near four-year high on Monday and the Hang

Seng tech index jumped more than 3% to its highest since March.

Optimism around tech, stimulus from Beijing and a U.S. trade

deal appear to be fueling the buying frenzy.

* High supply

The U.S. Treasury auctions a total of $183 billion of coupon

debt this week, starting on Tuesday with $69 billion of two-year

notes. The sales come at a critical juncture.

A resumption of the Fed's easing cycle next month is on the

cards even though inflation is above target and sticky. Yield

curves have steepened, although the 2s/10s curve has leveled off

in recent weeks. But ultra-long yields are firm - the 2s/30s

curve is near its steepest since January 2022.

Washington has indicated it wants to front-load its rising

new issuance and shorten the maturity profile of its debt. This

week will be another test of investor demand against a backdrop

of high economic, policy and market uncertainty.

* Deal me in

On the face of it, strong activity in the world of corporate

takeovers, deals and M&A is a sign of a healthy economy. But it

can also be a warning of excess froth and exuberance in

financial markets. Which applies to the U.S. right now?

Wall Street is at record highs and financial conditions are

the loosest in years. Inflation is above target and tariffs have

yet to properly hit. But the labor market is creaking, growth

has slowed sharply, and Powell has just opened the door to a

rate cut next month.

That's the backdrop to a flurry of M&A activity recently and

Wall Street banks hiring dozens of senior bankers to handle the

wave of dealmaking. Is this justified or not? The next few

months could be crucial.

Powell plays best hand he can from a politically stacked

deck

Federal Reserve Chair Jerome Powell is coming under fire for

appearing to cave to political pressure in his Jackson Hole

speech on Friday, which opened the door to an interest rate cut

next month, a shift from his more hawkish stance only a few

weeks ago. But the charge is unfair.

The heat is based not just on the economic justifications

for his apparent about-face, but the politics, namely the

accusation that he 'caved' to President Donald Trump's incessant

pressure to lower borrowing costs.

Powell was in a no-win situation. He essentially had three

potential avenues to go down when delivering the near-term

policy outlook, all of which left him open to charges of

political motivation.

First, he could have maintained the somewhat-hawkish steer

he provided in his July 30 press conference when he signaled

that the rate-setting committee was in no rush to adjust policy

and that more data was needed to justify a move.

But two days later came the unequivocally weak July

unemployment data, including downward revisions to May and

June's job figures that were among the largest on record outside

of a crisis or recession. This, unsurprisingly, sent the

market's expectations for rate cuts soaring.

If Powell had simply held the July 30 line in his Jackson

Hole speech despite the new data, he wouldn't have come across

as mildly hawkish but unabashedly tight.

Moreover, he would likely have been accused of politically

motivated stubbornness, with pundits arguing that he was

refusing to budge simply because he wanted to show Trump that he

would not buckle under presidential pressure.

That same charge would, of course, have also been leveled if

he had taken the second route, signaling that the uncertain

inflation dynamics made any thoughts of a rate cut now far too

premature.

That takes us to the third option. That's the one Powell

took when he indicated that the time to adjust policy was likely

approaching because of the worrying signs of weakness in the

labor market.

This isn't a commitment to ease policy, but an

acknowledgement that it's a strong possibility. It's also a

signal that the incoming economic data, specifically the August

employment and CPI inflation reports, will largely determine

whether the Fed cuts rates on September 17.

None of that suggests political interference is at play.

LABOR OF DOVE

The market seems to agree.

If rates traders believed easing now was a policy error -

given that inflation is still above target and could rise

further - longer-dated yields should have risen. They didn't.

The 10-year yield actually fell nearly 8 basis points.

Ten-year inflation swaps also dropped slightly to 2.43%,

roughly where they have been trading, on average, over the past

three months.

Tellingly, Powell's speech also failed to dramatically alter

the market's monetary policy expectations. U.S. rate futures

closed on Friday roughly where they had traded for most of last

week, pricing in around an 80% chance of a rate cut in September

and a near-100% probability of another one by December.

In short, not much to see here. Not yet, anyway.

To be sure, the economic case against Powell's dovish shift

is a strong one. Inflation is currently around 3%, and has been

consistently above the Fed's 2% target for more than four years.

Inflation expectations are also higher than the Fed would like,

even before factoring in any potential pass through from Trump's

tariffs.

In addition, financial conditions are looser than they have

been in years, with stocks and other assets hitting record

highs.

So why consider cutting interest rates? The argument appears

to be based on two beliefs: first that tariffs will be a

one-time hit to prices and thus should not lead to an

inflationary spiral; and second that unemployment has the

potential to shoot up quickly, meaning the Fed is wise to get

ahead of the curve.

Powell is clearly in an unenviable position. The two sides

of the Fed's dual mandate - maximum employment and stable prices

- are in tension, with data indicating looming risks on both

sides. And this conundrum has been made doubly difficult by the

public political pressure.

Powell was caught between Trump and a hard place. He did the

best he could.

What could move markets tomorrow?

* Reserve Bank of Australia minutes

* South Korea consumer sentiment (August)

* Hong Kong trade (July)

* Taiwan industrial production (July)

* Bank of England's Catherine Mann speaks

* Bank of Canada Governor Tiff Macklem speaks

* U.S. durable goods (July)

* Richmond Fed President Thomas Barkin speaks

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