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• The Fed kept the policy rate unchanged yesterday at 5.25-5.5%. The new statement featured some important changes compared to the June one, which are seen as paving the way towards a first, September rate cut. It noted that there was some further progress of inflation, which they now label as “somewhat” elevated, while striking a less upbeat tone on the labour market (“moderated” instead of “strong” job gains). The FOMC saw the risks of achieving its employment and inflation goals continue to move into better balance, culminating in what was the most important change: the committee turned from being “highly attentive to inflation risks” to “attentive to the risks to both sides of its dual mandate”. As such, the statement is now capturing what several Fed officials have been voicing in previous speeches, namely that the weight of the labour market in their assessment is currently as big (if not bigger) as inflation’s. Fed Chair Powell in the presser afterwards reiterated (as he did before Congress) that the labour market is no longer a source of inflation risk. The Fed did not cut yesterday because it eventually decided to first want further evidence of inflation returning to target sustainably. But Powell in the presser afterwards said they had “a real discussion” about it. So barring any accidents (eg. sharp inflation uptick), September looks like a done deal. Powell was reluctant to give any hints going forward but the lack of pushing back against current market pricing (two, close to three cuts this year and four in the next) suggests the FOMC is okay with it. The chair did note that larger-than-usual 50 bps cuts are not something they are considering right now. As such, Powell isn’t per se excluding a November cut. “Anything that we do before, during or after the election will be based on the data, the outlook and the balance of risks, and not on anything else.”, Powell said to dismiss the political sensitivity around such a decision. The FOMC’s pivot was a more explicit one than we and markets expected. US yields dropped between 9.2 and 12 bps across the curve. 4.33% support in the 2-yr broke & the 10-yr dropped out of the downward trading range to the March low. Some final data this week, including Q2 unit labor costs and the manufacturing ISM today and especially US payrolls tomorrow will have a last say on the fate of these technical levels. Money market odds for 75 bps of cuts this year rose to 95%, the highest since end-March. The expected terminal rate this cycle also edged slightly lower (end 2026). Wall Street rose up to 2.6% (Nasdaq). The US dollar traded remarkably resilient given the risk on and yield drop. EUR/USD eked out a small gain to 1.0826 after trading within a narrow 1.08/1.085 trading range all day. USD/JPY finished around 150 on both a stronger yen and weakish USD. The pair extended losses in Asian dealings this morning by dropping as low as 148.5 before snapping back intraday. The Bank of England comes into focus today. It’s a knife-edge decision between cutting or keeping the rate stable at 5.25%. We think odds for the former are slightly bigger. Updated forecasts are a good entry point. Meanwhile, the elections are out of the way and the BoE could be eager to capitalize the market momentum. The Fed now clearly hinting at cuts soon is an additional argument, though the UK central bank probably won’t mention it as such.
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