Treasuries Fall as Trump Shakes Fed Chair Wagers: Markets Wrap

(Bloomberg) — Hopes for another buoyant day across asset classes were deflated at midday over concern President Donald Trump is cooling on his dovish front runner to head the Federal Reserve.

Treasuries dropped across the curve as traders slightly dialed back expectations for Fed rate cuts this year. The S&P 500 struggled to gain traction on Friday despite a rally in giant chipmakers, and finished lower for the week. Small caps kept rising, with the Russell 2000 beating the US equity benchmark for an 11th straight session.

Trump on Friday said if Kevin Hassett were to leave his post as director of the White House National Economic Council, it would deprive the administration of one of its most powerful messengers on the economy. He has been seen as a top contender to succeed Fed Chair Jerome Powell.

In an interview with Reuters earlier this week, Trump suggested he was considering both Hassett and former Fed Governor Kevin Warsh for the role, among others.

“If I had to pick between the two Kevin’s, I’d go with Hassett over Warsh,” said Neil Dutta at Renaissance Macro Research. “So crushing Hassett only helps Warsh. We know that Kevin Warsh has been hawkish his entire career. He hates inflation even when it is running below the Fed’s target. It would be an interesting choice given the President’s policy views.”

The S&P 500 was little changed. A closely watched gauge of chipmakers climbed 1.1%. The Russell 2000 added 0.1%. The yield on 10-year Treasuries climbed six basis points to 4.22%. The dollar wavered. US markets will close Monday for a federal holiday.

“The rise in 10-year yields would be concerning if today wasn’t the Friday before a three-day weekend,” said Steve Sosnick at Interactive Brokers. “The 4.20% yield level has acted as resistance since September. It is difficult to imagine that a significant change in bond-market sentiment will take root on a Friday afternoon ahead of a three-day weekend.”

“I actually want to keep you where you are, if you want to know the truth,” Trump told Hassett during a White House event. “If I move him, these Fed guys — certainly the one we have now — they don’t talk much. I would lose you. It’s a serious concern to me.”

Trump’s remarks that he would like to keep White House advisor Hassett in his current seat catapult Warsh into pole position in the race to succeed Powell as Fed chair, while adding a little to Christopher Waller’s chances, according to Krishna Guha at Evercore.

“It is not certain this is a definitive signal – the President has given various signals at various times and appears to enjoy the drama of this Celebrity Apprentice season – but it does look as if the former Fed governor is for the first time the clear front-runner,” he noted.

What would a Warsh Fed chairmanship mean?

“We think near term through end 2026 he would be more or less as dovish as Hassett would be on the basis of supply side optimism, the difference is that he would be more likely to revert to older hawkish traits if the economy turned out to overheat in 2027/2028,” Guha concluded.

Money markets priced in slightly lower odds of two quarter-point rate cuts by the Fed this year after Trump’s comment on Hassett.

“For the sake of central banking independence, we’re encouraged to see that Hassett is no longer the front-runner, and in his place, Warsh is favored to get the nod,” said Ian Lyngen at BMO Capital Markets. “Our take is that Warsh would be a market-neutral choice – triggering no significant price action aside from perhaps further bearishness in the front-end of the curve as his experience and reputation imply an ability to build consensus on the FOMC.”

“Moreover, he isn’t Hassett – who is widely viewed as having the greatest loyalty to President Trump and would therefore be most likely to push for lower rates even if the data indicated otherwise,” Lyngen added.

Trump has moved to assert control over the central bank in his second term, regularly expressing frustration that the Fed has not more aggressively reduced borrowing costs under Powell and searching for a new leader who the president has indicated he expects to deliver rate cuts. Powell’s time as chair is set to end in May, but he can stay on the Board of Governors for two more years.

“We maintain that the evolution of the real economy will ultimately dictate the extent to which the Committee will be able to resume the path toward neutral despite the White House’s often stated preference for lower rates. In the event that there are headwinds to a March cut as well, we’ll look for an increase in Trump’s criticisms of Powell,” Lyngen said.

With analysts now broadly expecting fewer Fed rate cuts in the pipeline this year, and the administration’s clear desire to see rates lowered regardless of nearly any economic scenario, Tom Garretson at RBC Wealth Management sees a growing risk that all of this culminates in an even more serious showdown between the Trump administration and the issue of Fed independence.

The Federal Open Market Committee voted 9-3 in December to lower the benchmark federal funds rate to a range of 3.5%-3.75%. It also subtly altered the wording of its statement suggesting greater uncertainty about when it might cut rates again. The result marked the first time since 2019 that three officials voted against a policy decision, with dissents on both ends of the policy spectrum.

Fed Vice Chair for Supervision Michelle Bowman said monetary policy remains moderately restrictive and officials should be prepared to lower rates further unless the employment landscape improves.

“Incoming data continue to point momentum in consumer spending, less downside risk to labor markets and manufacturing, and limited upside risk to inflation,” said Michael Gapen at Morgan Stanley.

“The favorable macroeconomic environment, characterized by contained inflation and accelerating growth, allows markets to withstand geopolitical tensions and continue their upward trajectory despite uncertainties,” said Florian Ielpo at Lombard Odier Asset Management.

This positive momentum has fueled a rotation in which value stocks outperform growth shares, he noted.

“As long as inflation does not resurface to impose higher capital costs, the outlook should remain favorable, with valuations potentially supported by earnings that could continue to positively surprise against the backdrop of technological progress,” Ielpo said.

In fact, the fast-paced rally in small caps, sidelined for much of last year, has been fueled by a combination of falling interest rates and economic growth — dual tailwinds that many on Wall Street see as likely to propel the riskier group to market leading gains. So far this year, the Russell 2000 is up almost 8% compared with a nearly 1.5% gain for the S&P 500.

Going back to 1979, there are five other instances in which the small-cap gauge opened a lead of at least 500 basis points over the US equity benchmark in the first month of the year, according to Bloomberg Intelligence’s Michael Casper and Nathaniel Welnhofer.

The small-cap index kept its lead in four of those calendar years, BI said. The only exception was 2021, when unprofitable Russell 2000 companies were in a bubble. Though the S&P 500 closed some of the gap in three of those years, the Russell 2000 still ended with an average gain of 22.6% across all five instances.

“There’s a new king of the hill to start 2026,” said Brian Jacobsen at Annex Wealth Management. “Instead of large‑cap growth, small‑cap value is taking the crown. After years of head‑fakes — moments when it seemed big‑cap tech’s dominance might finally give way to broader market participation — the long‑anticipated ‘Great Rotation’ may finally be taking shape.”

“Investors typically like to see small caps rally because most of their money is made domestically, so gains there tend to reflect bets on a booming economy,” said Hardika Singh at Fundstrat Global Advisors. “That’s a good sign because over the past year, investors watched every single economic report with a clenched jaw for signs of a downturn that are yet to turn up.”

Singh notes that there’s growing hope that this rally isn’t a “headfake” like the other ones have been since the pandemic.

“What’s most encouraging right now isn’t that the S&P 500 is near record highs — it’s how we’re getting there,” said Mark Hackett at Nationwide.

He noted that leadership is broadening beyond the “Magnificent Seven,” volatility and bond market stress remain muted, and many of the key bear-case arguments around inflation and labor are fading.

“That combination creates a much healthier backdrop for this rally, even if markets pause in the short term,” Hackett said.

He noted that earnings season has been a sluggish period for equity markets in recent quarters, as markets rallied into the reports and the share repurchase blackout limits support, potentially driving a short-term pause, but the strong macro backdrop, accelerating earnings, and the cascade of tailwinds on the way support the bullish argument.

“Given longstanding concerns about the market being dominated by a handful of megacap tech names, some rotation away from them is arguably a healthy longer-term development, even if it feels disconcerting in the near term. We may finally be seeing the ‘broadening out’ that so many people have looked for,” said Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research & Strategy Team.

Meantime, Robert Shiller’s stock-market valuation indicator, the cyclically adjusted price earnings ratio or “CAPE ratio,” shows equity valuations are near the highest since 1880, according to Apollo Chief Economist Torsten Slok.

“Stocks are extremely overvalued,” Slok writes in a note. He says that the Shiller ratio, which uses 10 years worth of inflation-adjusted earnings, “provides a better gauge of sustainable earnings power than the traditional P/E ratio, which uses only one year’s earnings” as it smooths out business cycle volatility.

“Bull markets don’t die of old age,” said Maria Vassalou, head of Pictet Research Institute. “I think the current environment is greatly driven by your political and macro developments, which will determine the actual valuations of firms and profitability and so on.”

The message from the markets is that a procyclical global upswing is underway with value and small-cap stocks outperforming year-to-date and equities broadening out, according to Doug Beath at Wells Fargo Investment Institute.

“Despite the strong start to 2026, we would not be surprised if markets experience volatility in the coming weeks as fourth-quarter earnings progress and the threat of escalating geopolitical tensions remains,” he said.

Beath also noted he’ll treat pullbacks as opportunities to rebalance funds toward favored sectors that benefit from the ancillary trends related to artificial intelligence with more attractive valuations: financials, utilities, and industrials.

“We maintain our conviction that the structural trend of AI will continue to power equity performance in the years ahead, and believe exposure to AI-related stocks is essential for long-term wealth preservation and appreciation,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.

But as in other innovation cycles in the past, she expects to see a performance handover from the enablers to the users of AI, and see room for catch-up from companies that leverage AI to improve business outcomes.

“Our top picks in this regard remain financials and health care, which are also supported by favorable fundamentals,” added Hoffmann-Burchardi.

Corporate Highlights:

OpenAI will start testing advertisements in the ChatGPT app for certain US users, marking a major shift for the company as it seeks to bolster revenue from the popular chatbot. Paramount Skydance Corp.’s leadership has held talks in recent days with French President Emmanuel Macron amid a European charm offensive to garner support for its $108.4 billion hostile bid for Warner Bros. Discovery Inc. Movie theaters warned European Union merger watchdogs that a takeover of Warner Bros. Discovery Inc. by either Netflix Inc. or Paramount Skydance Corp. threatens to harm their industry. Walmart Inc. appointed new heads for its three main divisions, completing a leadership refresh at the world’s largest retailer. PNC Financial Services Group Inc. reported a 9% increase in fourth-quarter revenue, beating analysts’ estimates as financing and dealmaking by middle-market customers accelerated. Regions Financial Corp. reported earnings per share and total loans for the fourth quarter that came in below the average analyst estimate. The bank also said it sees net interest income declining in the first quarter of 2026. State Street Corp. reported higher expenses and an outlook for net interest income that came in below Wall Street’s expectations. JB Hunt Transport Services Inc. reported quarterly revenue that missed estimates, underscoring continued weakness in freight demand. DraftKings Inc., Flutter Entertainment Plc and other stocks linked to the sports gambling industry sank after new data suggested that they may be losing ground to competing products from prediction market startups. DoorDash Inc. Chief Revenue Officer Lee Brown is departing the delivery app company after less than six months to pursue a new opportunity. Fannie Mae and Freddie Mac extended days-long losing streaks amid mounting unease about the impact of President Donald Trump’s policy moves on efforts to release the mortgage-finance giants from government control. Honeywell International Inc. rose after JPMorgan Chase & Co. raised the recommendation on the industrial company to overweight from neutral, writing it has “extended its discount” to a sum-of-the-parts valuation. Kraft Heinz Co. fell after Morgan Stanley downgraded the shares to underweight from equal-weight. Mosaic Co. slumped as the fertilizer company said North American demand “declined well beyond normal seasonal softness” in the fourth quarter due to a weak farmer economy and weather. The Federal Aviation Administration is urging US airlines to “exercise caution” when flying over Mexico, and parts of Central and South America, citing “military activities” and potential interference to navigation systems in the region. A federal judge said Dominion Energy Inc. can restart construction of a wind project off the coast of Virginia while it continues a legal fight over the Trump administration’s order to stop the $11 billion development. The US Supreme Court agreed to hear Bayer AG’s appeal taking aim at thousands of lawsuits targeting its top-selling Roundup weedkiller for causing cancer. Porsche AG’s deliveries fell 10% last year, the steepest drop since 2009 when the global financial crisis roiled markets, following weak demand for electric vehicles and a slump in China. Glencore Plc has agreed to buy at least 500,000 tons a year of hot briquetted iron from a planned Oman-based plant, securing supply of the low-carbon steelmaking input from 2030. Mitsubishi Corp. agreed to buy Aethon Energy Management LLC’s US gas and pipeline assets for $5.2 billion, the biggest purchase by a Japanese company in the American shale sector. Reliance Industries Ltd. reported a lower-than-expected quarterly profit as sluggish growth in the petrochemical and retail businesses offset a strong showing in its refining and telecom units. Some of the main moves in markets:

Stocks

The S&P 500 was little changed as of 4 p.m. New York time The Nasdaq 100 was little changed The Dow Jones Industrial Average fell 0.2% The MSCI World Index was little changed Bloomberg Magnificent 7 Total Return Index fell 0.2% Philadelphia Stock Exchange Semiconductor Index rose 1.1% The Russell 2000 Index rose 0.1% Currencies

The Bloomberg Dollar Spot Index was little changed The euro was little changed at $1.1601 The British pound was little changed at $1.3382 The Japanese yen rose 0.3% to 158.08 per dollar Cryptocurrencies

Bitcoin was little changed at $95,502.03 Ether fell 0.1% to $3,294.17 Bonds

The yield on 10-year Treasuries advanced six basis points to 4.22% Germany’s 10-year yield advanced two basis points to 2.83% Britain’s 10-year yield advanced one basis point to 4.40% The yield on 2-year Treasuries advanced three basis points to 3.59% The yield on 30-year Treasuries advanced four basis points to 4.83% Commodities

West Texas Intermediate crude rose 0.4% to $59.41 a barrel Spot gold fell 0.7% to $4,583.30 an ounce –With assistance from Isabelle Lee.

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