Rock Paper Scissors

By Elwin de Groot and Bas van Geffen, strategists at Rabobank

Many readers will know “rock, paper, scissors.” The key feature of this game is that there is no upfront winner, it’s outcome is entirely determined by chance. Paper wins from rock, rock from scissors, and scissors wins from paper. In a way, there are parallels with what we see today – although not all players are showing their hand at the same time. Let us explain. Let rock (🪨) stand for verbal comments or announcements; paper (📄) written deals or legislation; and scissors (✂️) the implementation (or not!) of such deals. This week offers some excellent examples of nothing being set in stone – or, rather, rock.

Following the meeting between President Putin and Trump in Alaska, the White House had said it believed Putin agreed to a meeting with the Ukrainian president, and that planning was  “underway” (🪨). Yesterday German chancellor Merz told reporters: “Apparently a meeting between Zelenskiy and Putin won’t happen, unlike what has been agreed between President Trump and Putin” (📄). Could this re-open the road new (secondary) sanctions on Russia?

Another great example are the comments made by Nvidia chief Jensen Huang during the company’s earnings call this week. Trump had touted a 15% (China) revenue sharing agreement with the company (🪨), but Huang noted that there was “no regulation that enforces such requirement published” (📄). Having said that, the Trump administration does have the option to impose export controls (📄), so markets will have to sort out whether this is a clear win for the company or a potential stalemate.

Turning to another big theme for markets, Trump’s continued attacks on Fed Chair Powell have become easy to brush off. His move to fire Cook caused some swings in US Treasury yields this week, but markets have been fairly sanguine in the face of these attacks on the Fed’s independence. Perhaps that’s because Cook is prepared to go to court over her dismissal. Yesterday, her lawyers have filed an emergency injunction to block Cook’s dismissal and to “confirm her status” as a member of the Fed’s board. Will her ✂️ ultimately shred the White House’s 📄?

And, perhaps, calm has prevailed because the presidents of the regional Federal Reserve banks – which share five votes on the FOMC – can still effectively block Trump’s allies on the Fed’s Board of Governors. Yet, that begs the question why there wasn’t a stronger market reaction to this week’s news that Trump’s advisers are now also looking into ways to increase the White House’s control over the regional Federal Reserve banks.

The administration is reportedly looking for ways to offer positions at the helm of regional banks as consolidation prize to those candidates who do not get selected as Powell’s replacement. Since the news broke mid-week, it has not become more clear how Trump plans to achieve this exactly – or if he can. But the broadening of Trump’s attacks on the Fed should be more concerning.

Central bankers are certainly starting to feel threatened. Earlier this month, former New York Fed President Dudley said the Fed is built to withstand these political pressures; now he’s not so sure anymore. Former Fed Chair Yellen called Trump’s moves “profoundly dangerous.” Even foreign monetary policymakers are warning for the consequences. The ECB’s Rehn said that testing Fed independence “could have substantial, global knock-on effects on both the financial markets and the real economy.”

Their concerns are logical. But are these developments perhaps partly the result of their own doing? Since the Global Financial Crisis, central banks have been frequently accused of mission creep. Whether that is because they suddenly found themselves in the business of rescuing banks and even countries, or because they had added more layers of complexity to their mandates such as policy measures aimed to support the green transition. Although it could make perfect sense from an economic viewpoint – after all, a lot of things are ultimately affecting the outlook for growth and inflation – it may also undermine central bank’s esteem in political circles.

To give a most recent example, at last week’s Jackson Hole, policymakers discussed the structural trends in labor markets, including observations like “migration could, in principle, play a crucial in role in easing labor supply constraints.” Assuming that the migrants’ skills match those needed by employers, central bankers argue that migrants boost the economy. Yet, such arguments go against much of the political winds in the US and elsewhere.

In a broader sense, the White House needs the Fed to align with its policy agenda. Yes, Fed independence is crucial for its credibility as inflation fighter. But is it really still all about inflation? Trump is borrowing a page from the Chinese playbook and the administration is increasingly taking the lead – and outright stakes – in key US supply chains.

Meanwhile, Europe may not willingly engage in such schoolyard games as rock, paper, scissors, but it is being bullied into playing. The EU took a trade ‘deal’ with Trump that wasn’t as equal as Brussels said it would require. But at least it prevented worse, right? The European Commission put forward two proposals yesterday that eliminate the tariffs on US industrial goods and give preferential treatment to some agri and food products. These were preconditions for a reduction in the US tariff on European cars and car parts to 15%.

Yet, the European Council would still have to approve such a decision and the fast track approach also raises questions about whether this will only apply to the US imports or to all cars imported into the EU. Given there is no formal trade agreement, it is our understanding that it would normally imply a cut in tariffs for all Most Favored Nations, according to WTO rules. If the EU were to deviate from this “rules based” approach, it would be openly using its ✂️ against the 📄 of the WTO.

Meanwhile, the “deal” itself has already been put into question, for President Trump is –once again– threatening to impose tariffs on countries whose digital taxes and legislation “discriminate against American technology.” 🪨 That potentially includes several European countries and by construct would end up on the EC’s plate. In other words, there is absolutely no certainty that the deal will not fail altogether. French President Macron is taking a combative stance once again. But how much influence can Macron exert when his own country is at the brink of a political crisis over the 2026 budget. Brussels is taking a stand as well. How long will they last when Trump tightens the screws? How would this end any different than the EU-US trade deal? European leaders may threaten this requires a review of the trade deal, but according to the rules of the game, ✂️ always loses to Trump’s 🪨.

So, some trade uncertainty lingers but the Eurozone economy, has not (yet) taken a turn for the worse. That should keep the ECB on hold for the time being. The accounts of the July meeting noted that the Governing Council believed that “there was a high option value to waiting for additional information,” and we would argue that the time value of this option has not decayed – or at least not significantly.

Staying on hold was considered the “robust approach,” and we don’t see any immediate concerns in the accounts –or in economic developments– that warrant a different take in September. “The discussion had moved […] to potential marginal adjustments for the remainder of 2025,” which boils down to the more fundamental debate on how to conduct policy at times of heightened circumstances. Some policymakers may favor further finetuning or “insurance cuts,” but others fundamentally oppose this. They argue that it is inappropriate to micromanage the policy rate in the face of high, two-sided, uncertainty, since that also creates the risk that the policy stance could turn out too loose. For now, the ECB is portraying itself as the rock markets can build on.