Indexes Continue Record Rally

STOCK INDEX FUTURES

Stock index futures are higher as markets increasingly expect the Fed to cut rates at its meeting in September. Stocks moved higher on Tuesday as markets digested the July CPI inflation report that came in line with expectations. The Nasdaq and S&P had record closes, while the Dow finished around 1% higher, bolstered by bets that the Fed will cut rates in September and optimism that inflation is not drastically increasing – so far.

Core prices rose 0.3% in July, which amounted to 3.1% on an annualized basis, above expectations of 3.0% and a step above June’s 2.9%. Headline inflation came in at 2.7% on an annualized basis, softer than expectations of 2.8%, as a drop in gasoline prices helped ease overall inflation. Investors are now pricing in roughly a 94% chance the Fed will cut rates in September, up from an 86% chance seen on Monday. Late Monday, President Trump announced that he nominated E.J. Antoni, chief economist at the conservative Heritage Foundation, to lead the Bureau of Labor Statistics. Market attention will shift to weekly jobless claims data and PPI inflation data due Thursday, followed by retail sales for July and the University of Michigan preliminary consumer survey for August on Friday.

President Trump signed an executive order extending the tariff truce between the US and China for another 90 days, pushing trade negotiations out to the fall. China also announced the extension of the tariff pause on state media. On Tuesday, reports said China urged local firms not to use Nvidia H20 chips, complicating Trump’s bid to turn those sales into a US windfall. Trump also said imports of gold to the US would not face a tariff after a customs agency ruling on Friday that popular gold bars would be subject to new duties.

CURRENCY FUTURES

The USD index is lower, hitting a two-week low as traders ramp up bets that the Fed will cut rates in September following the modest inflation data on Tuesday. CPI inflation data showed that overall inflation is moderating; however, core inflation remained sticky, especially in services like shelter and medical care. Given that inflation came in line with expectations and that core prices remained sticky, although there were no signs of any drastic increase, the Fed will likely look to the August labor report as a final factor for policy guidance. Also pressuring the dollar was President Trump’s pressure on Jerome Powell and the Fed’s independence. White House spokeswoman Karoline Leavitt said on Tuesday that the president was considering a lawsuit against Powell in relation to his management of renovations at the central bank’s Washington headquarters.

Euro futures are higher against the dollar. German CPI inflation matched expectations in July, growing 0.3% and coming in at 2.0% on an annualized basis. Spanish inflation also matched expectations at -0.1% in July and 2.7% on the year. The ZEW Indicator of Economic Sentiment dived 18.0 points on the month to 34.7 in Germany for August, while it fell 11 points to 25.1 for the eurozone as a whole. Market attention will turn to Friday’s meeting between President Trump and Putin, aimed at finding a resolution to the war in Ukraine. On the data front, final inflation figures for July are being released from France on Thursday. Eurozone industrial production figures for June are also due on Thursday, alongside second-estimate eurozone GDP data for the second quarter.

British pound futures are higher as the pound hit a three-week high against the dollar on Wednesday, as markets are pricing that US interest rates will fall quicker than rates in the UK. UK labor data on Tuesday showed weakness in hiring but persistent wage growth, a positive for British consumers but a headache for the Bank of England, which is juggling the risks of a slowing economy and stubborn inflation. The number of workers on payroll fell by 26,000 between May and June, while the unemployment rate rose to 4.7% from 4.5% over the same period. This trend raises concerns that rising labor costs, partly driven by new payroll taxes, may be weighing on hiring activity. Average weekly earnings excluding bonuses rose 5.0% year-over-year in the three months to June, unchanged from May. Including bonuses, earnings rose 4.6%, down from 5.0% in the previous month. Private sector wage growth is expected to cool further later this year, which could provide the Bank of England with room to ease interest rates as wage pressures on inflation diminish. However, the BoE has forecast that annual inflation will peak at 4.0% in September. Looking ahead, upcoming data releases, including Q2 GDP and June industrial production figures due Thursday, will offer markets a clearer view of how the UK economy is holding up amid weakening labor conditions and persistent inflationary pressures.

Japanese yen futures are higher. PPI inflation data showed producer price growth slowed to an 11-month low in July, underscoring the pressure on local firms from higher US tariffs. On the monetary policy front, Bank of Japan board members remain split over the timing and pace of future rate hikes. Minutes from the BoJ’s July meeting showed that the central bank expected growth to be moderate while also expecting underlying CPI inflation to improve slightly. While a trade deal with the US has helped reduce some uncertainty, BoJ Governor Kazuo Ueda cautiously noted that the economic impact of high tariffs remains unclear, and underlying inflation is still below the 2% target. Markets are awaiting key GDP data out of Japan on Thursday, where growth is expected to rise 0.1% in the second quarter.

Australian dollar futures are higher against the dollar as expectations of a US rate cut led to the dollar to falling broadly against most major currencies. Wage growth data in Australia showed that wages held steady at a moderate rate of 3.4%, just above expectations of 3.3%, and not seen as an obstacle for the Reserve Bank of Australia to continue to cut rates in the future. Markets expect a 35% chance that the RBA will cut rates in September and are fully priced in for a rate cut in November. Underlying inflation in the country has retreated towards 2.1% and is expected to continue to moderate. Labor conditions in the country have eased slightly, with unemployment jumping to 4.3% in June from May, setting the bank up to continue a gradual easing path. The nine-member board of the RBA voted unanimously for the cut, ending a period of division after a split six-to-three vote in July to keep interest rates unchanged. Looking ahead, July employment figures are due on Thursday and expected to show 25,000 new jobs.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve as expectations of a Fed rate cut in September grip investors. Yields were higher at the long end of the curve and lower at the more interest-rate-sensitive front end on Tuesday, following the release of July CPI data. The data showed that inflation in July was modest, with headline CPI rising 0.2%, down from 0.3% in June. Core CPI (excluding food and energy) rose 0.3%, up from June’s 0.2% and the largest gain in six months, reflecting persistent price pressures in shelter, medical care, recreation, and travel. Food prices were flat, as grocery costs dipped slightly while restaurant prices rose. Energy prices declined, led by a 2.2% drop in gasoline, helping to offset broader inflation. Short-term yields are likely to remain anchored by Fed policy, but any signs of further cooling could boost demand for Treasuries, pushing yields lower.

The modest cooling in inflation is a good sign for the Fed that price pressures are not increasing as dramatically as initially feared, but tariff pass-through is expected to increase prices into the fall, where inflation from tariffs will most likely make itself evident. However, the data should be good enough for the Fed to cut rates in September despite some troubling price increases in services, where inflation tends to be sticky. Earlier in the summer, services like airline fares and hotels were falling sharply, which had driven down overall inflation, but that trend reversed, with airfare up 4% month-over-month, medical care services up 0.8%, and motor vehicle maintenance up 1%. Recent PMI data has confirmed that the services sector is facing higher costs, with rising wage costs and tariffs directly contributing to steeper input price inflation, which firms passed onto customers. As a result, output price inflation increased, reaching one of the highest levels recorded over the past three years.

Businesses have been hesitant to raise prices so far as they wait and see how their supply chains and products are affected by tariffs. Now that there is more certainty in regard to tariff levels, businesses will likely want to reduce the burden of the duties duties and raise prices, although they will still try to maintain a competitive price landscape. This will likely result in tariffs having a slow drip effect on prices as companies adjust prices gradually.

The spread between the two- and 10-year yields rose to 55.6 bps from 53.7 bps on Tuesday.

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