Markets rally on solid US Data, dovish Fed signals stir policy debate

Markets

The latest batch of US eco data and the absence of destabilizing headlines from the US president helped the S&P 500 (+0.54%) and Nasdaq (+0.75%) to new all‐time closing highs. The dollar extended the July comeback with the trade‐weighted dollar (DXY) ending the day 98.73 from 98.35. The greenback managed to record daily gains on all but one trading day so far this month, but we must add that the cumulative increase remains limited so far to only 1.7% which compares with a >10% loss in H1 2025. EUR/USD closed at 1.1596 from a start at 1.1641. First technical support only arrives around 1.1461/31 (mid‐June low & 24% retracement on this year’s rally). Daily changes on the US yield curve were limited between +1.2 bps (2‐yr) and ‐0.4 bps (30‐yr). This hides intraday volatility around the release of solid (and consensus‐beating) June US retail sales (+0.6% M/M headline; +0.5% M/M control group), lower‐than‐expected weekly jobless claims (221k from 228k) and a surge in July Philly Fed business outlook to the best level since February. New orders, shipments and employment all moved back into expansion territory, but price pressures increased as well (expected prices paid highest since January 2022). US Treasuries initially sold off on the data, but the move didn’t went far.

Dovish comments by Fed governor Waller grab attention this morning. They gently lift US Treasuries while weighing somewhat on the dollar. He repeats his call that it would make sense to lower the policy rate by 25 bps as soon as this month’s FOMC meeting. “With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate. The economy is still growing, but its momentum has slowed significantly and the risks to the FOMC’s employment mandate have increased.” Waller expects growth to remain soft for the rest of 2025. Together with Fed Bowman, Waller is the only one to back a July rate cut with the vast majority of the FOMC supporting Powell’s view to assess the summer inflation prints before drawing firm conclusions on the inflationary impact of Trump’s protectionist trade policy. SF Fed Daly nevertheless warned that you can’t wait forever (with making monetary policy less restrictive), because if you wait until inflation is 2% you risk injuring the economy in a way that was completely unnecessary. Daly still sees a path to two (25 bps) rate cuts this year. Recent Fed comments suggest that the September FOMC meeting might be a confrontational one between doves and hawks. Today’s US eco calendar contains housing data and July consumer confidence from the University of Michigan survey. Markets will be looking for more moderation in 1y (5% in June) and 5‐10y (4%) inflation expectations. Overall, we expect this week’s trends on major markets to persist (friendly risk sentiment; breathing space for USD; truce in long term core bonds).

News and views

National Japanese inflation excluding volatile fresh food prices, slowed in June to 0.1% M/M and 3.3% Y/Y from 0.5% M/M and 3.7% Y/Y in May. A measure excluding fresh food and energy prices, rose further by 0.4% M/M and 3.4% Y/Y from 3.3% in May. Both indices hold well above the Bank of Japan’s 2% target. A decline in energy/utility prices was behind the decline in core inflation. Services inflation accelerated to 0.3% M/M and 1.5% from (1.4%). Goods price inflation slowed to ‐0.1% M/M and 4.8% Y/Y (from 5.3%). A rise in underlying, cost‐driven prices keeps the debate open on the timing of further BoJ policy normalization even as the potential negative impact of trade tensions recently put the central bank in a wait‐and‐see modus. Markets are very cautious in discounting further policy tightening (60% probability of 25 bps rate hike by year‐end). The yen this morning underperforms but this probably mirrors investor caution going into this weekend’s Upper House elections. (USD/JPY 148.75).

Reuters reports that the Bank of England asked some lenders to test their resilience to potential US dollar shocks. The central bank was said to have requested that some lenders assess their dollar funding plans and the degree to which they depend on the US currency, including for short term needs. Amongst others, a bank reportedly was asked to run internal stress tests including scenarios where the USD swap market could dry up entirely. In the background the question swirls whether entities outside the US still can rely on Fed USD swap facilities in case of a shortage of US liquidity.

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