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Risk appetite is running hot, driven by intensifying bets of a September Fed cut. The S&P 500 Index rose by 0.3% to a new record high of 6466.58. Both the US Treasury 2-year and 10-year bond yields eased by 5.6 bps to 3.675% and 4.233%. The DXY Index slipped another 0.3% overnight, on top of Tuesday’s 0.4% decline, to a two-week low of 97.8. By increasing the odds to 106.8%, the futures market has fully priced in a 25-bps cut, while treating a 50-bps cut as a live but minor possibility for an insurance cut. Hence, investors and traders are likely to apply the “bad news=good news” rule, treating softer US data as fuel for lower yields, a weaker USD, and stronger risk appetite, while viewing stronger data as a brake to the easing narrative.
Today’s higher US PPI inflation will unlikely revive worries about tariff-led inflation. Consensus expects headline inflation to rise to 2.5% YoY (0.2% MoM) in July from 2.3% YoY (0% MoM) in June. Markets will likely brush aside the faster rise in core PPI inflation to 3% YoY from 2.6% if it stays at a manageable 0.2% MoM, more so if Friday’s import prices report a third negative MoM reading in July. Initial jobless claims may have a limited impact because the dip in July did not reflect the deterioration in the nonfarm payrolls.
Friday’s US data will likely be more consequential. July’s advance retail sales will provide a clue to whether US consumer spending will continue to be strong at 0.6% MoM, at the same pace as June. Capacity utilisation is likely to align with the softer ISM Manufacturing PMI, easing to 77.5% in July from 77.6% in June. Inflation expectations will be a key factor in the preliminary University of Michigan Survey of Consumers. Having dropped from 6.6% in May to 4.5% in July, 1Y inflation expectations are expected to moderate to 4.4% in August. Consumers will likely expect inflation to remain at 3.4% over the next 5-10 years, the same level as in July, compared to the 4.4% high in April. While the broader sentiment index is likely to improve to 62 from 61.7 due to higher stock markets, the current conditions are expected to slow to 67.3 from 68.0, primarily due to job insecurity.
Barring any surprises, we expect the USD to remain weak leading up to the Kansas City Fed’s Jackson Hole Economic Policy Symposium, scheduled for August 21-23. The Trump administration has been on a messaging blitz before the event, overshadowing Fed Chair Jerome Powell’s cautious, data-dependent stance on monitoring the impact of tariffs on inflation. US Treasury Secretary Scott Bessent has gone from calling for a 50-bps cut to stating that interest rates should be 150 bps lower from current levels. Having fired and replaced the Bureau of Labor Statistics chief and working to fill the Fed with like-minded Fed candidates on rate cuts, President Trump’s playbook will likely continue to involve publicly disputing Powell’s assessment of growth and inflation, positioning any dovish tilt as a victory resulting from his pressure campaign.
Quote of the Day
“Inertia is a powerful force in human and political affairs.”
Maurice Strong
August 14 in history
France became the first country to introduce motor vehicle registration in 1893.
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Related Insights
- Market pricing vs. Fed pushback18 Aug 2025
- India markets: S&P rating upgrade 15 Aug 2025
- Prospective JPY gains on BOJ rate hike expectations (15 Aug 2025
Related Insights
- Market pricing vs. Fed pushback18 Aug 2025
- India markets: S&P rating upgrade 15 Aug 2025
- Prospective JPY gains on BOJ rate hike expectations (15 Aug 2025