Stocks After Trump Greenland Drama: Will PMI Data Cap Gains?

Stock markets steadied as the drama over Greenland ebbed, but PMI data now threatens their Fed rate cut hopes.

• Wall Street turned higher after President Trump backed off owning Greenland
• US PCE inflation data dismissed by markets even as Fed rate cut bets inch down
• S&P Global PMIs are next in focus. Upbeat results may threaten risk appetite

Stock markets in the United States pushed higher after President Doland Trump walked back his demands for ownership of Greenland. Since the start of his second term last year, Trump has loudly argued that the US needs to take over the semi-autonomous Danish territory on national security grounds, as a regional military staging area.

First, the president ruled out the use of force in acquiring Greenland while speaking at the annual gathering of the World Economic Forum (WEF) in Davos, Switzerland. A post on his Truth Social platform followed, announcing that a “framework” for expanded access to Greenland – where the US already has a miliary base – was agreed following a meeting with NATO Secretary General Mark Rutte.

Mr. Trump roiled markets when he threatened to hit several European countries including the United Kingdom and France with an additional 10% tariff starting on February 1 after they beefed up their miliary presence in Greenland. That came after the president escalated public demands for the territory and pointedly did not rule out using force.

Stocks rise after Trump’s Greenland U-turn, ignore PCE data

This bombshell sent Wall Street sharply lower as markets reopened from a three-day holiday weekend marked by Martin Luther King Jr Day. The bellwether S&P 500 index gapped lower and sank, losing 2.11% by the end of the day. That was the biggest drop since October 10, when Trump threatened China with tariffs over rare earths shipments. 

That dust-up ended with inaction as US and Chinese officials rushed to cool tensions. The markets cheered as Mr. Trump walked back his latest tariff menace at Davos. The S&P 500 has now recovered nearly all of its initial losses and trades down just 0.4% for the week, having lost as much 2.33% amid the worst of early selling.

Catch-up publication of US personal consumption expenditure (PCE) inflation data for October and November derailed by last year’s record-setting 43-day government shutdown passed without incident. The figures showed that headline and core price growth – which excludes volatile food and energy costs – rose to 2.8% year-on-year as expected.

Perhaps these figures were judged to be too stale by the markets, which have already seen analog consumer price index (CPI) inflation data for December and concluded it was good enough. A timelier set of figures may generate stronger interest as traders look ahead to January’s S&P Global purchasing managers index (PMI) survey.

Fed rate cuts back in focus as key PMI data looms ahead

These are expected to show that US economic activity growth steadied in January after cooling to an eight-month low in the prior month. Improvements are penciled in for both manufacturing and the service sector. The data follows explosively strong December PMI figures from the Institute for Supply Management (ISM) and an upbeat third-quarter gross domestic product (GDP) reading.

Whether the markets embrace such results might depend more on their implications for Federal Reserve interest rate cuts than their promise of economic strength, however. Markets have begrudgingly clawed lowered expectations. They are now pricing in 42 basis points (bps) in cuts this year, making for the least dovish setting since May.

Nevertheless, that still puts traders in favor of two cuts this year, with the first one fully discounted and the probability of a second one at a commanding 68%. This clashes with the Fed’s own prognostications, which have called for a single 25bps reduction this year.

PMI data that forces markets to inch closer to the Fed’s view may disappoint traders, which are already annoyed with the US central bank’s reticence to dial up stimulus. They seem to be wanting a backstop of cheaper money amid precisely the kind of policy uncertainty on display vis-à-vis Greenland, however healthy the US economy appears to be.

Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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