No Stopping The Dovish Fed Repricing

WHERE WE STAND – Short & sweet, this morning, after a rather dull day yesterday. I now know how those JGB market makers I alluded to earlier in the week must feel!

A barren data docket, and a dearth of notable news flow, coupled with typically thin summer trading conditions proved a rather potent mix to sap volatility, spark boredom among most participants, and see markets do little more than plod along in largely the same direction that was set after the July US CPI report dropped on Tuesday.

In short, the dovish repricing of Fed policy expectations continued, as the USD OIS curve now more than fully prices a 25bp cut next month, in turn posing a continued headwind to the greenback, putting a bid into front-end Treasuries, and seeing equities extend gains too. I think we best get used to that narrative, and to the market moves in question, given that the docket is now rather empty until Chair Powell speaks at Jackson Hole next week, leaving the ‘path of least resistance’ for markets pretty well-embedded for the time being.

I guess I should probably add here that I still think the market is too complacent about the apparent certainty the Fed will cut next month, especially with inflation having been above target for 53 months running, and clearly moving in the wrong direction. That said, given that we won’t be getting any pushback on the idea of a September cut until Powell’s aforementioned remarks, STIRs are probably not going to reverse course for the time being.

Speaking of the Fed, more potential names for the Chair role were being thrown around yesterday, including BlackRock’s Rick Rieder, and Jefferies’ David Zervos. While the ‘favourite’ for that job will probably still change a dozen times before an official announcement, I’m pleased to see the latter name in the mix, not least as I suggested having a cheeky fiver on such a nomination back in March.

As for market wagers, I retain my bullish equity bias. Frankly, it’s tough not to – earnings growth is impressive,; the tone on trade is becoming much softer; the economy remains resilient; and, even if that final point falters, the Fed have plenty of room to ease, be that in September, December, or more aggressively once the new Chair is installed.

Elsewhere, the Treasury curve will likely continue steepening, with the long-end vulnerable not only amid fiscal concerns, but also amid the risk of inflation expectations un-anchoring. That, plus continued Trump Admin meddling in terms of Fed independence – see, Bessent calling for a 50bp cut yesterday – should also continue to pose a stiff headwind for the greenback, with any rallies in the buck there to be sold into.

LOOK AHEAD – A busier docket today, though that’s a very low bar.

Here in Europe, we get GDP stats from both the UK and eurozone this morning. The latter is a 2nd estimate, and should confirm a meagre 0.1% QoQ expansion in the second quarter, with the same pace set to have been seen in the UK, as the tariff/activity front-running that propped up Q1 growth, acted as a drag in the following three months.

Stateside, we get both the weekly jobless claims stats, which continue to attract a fair chunk of attention after the disappointing July jobs report, as well as last month’s PPI data, which shan’t show anything in terms of a tariff impact (it excludes imports) but will be used as a guide for the PCE inflation print due at the end of the month.