Fed flags September rate cut

The Fed left interest rates unchanged following the conclusion of its two-day monetary policy meeting, as widely expected, but said a rate cut would be on the table at its next meeting in September. While this prompted a notable decline in US bond yields post meeting, the reaction in the FX market was fairly muted. Meanwhile, sterling is giving up some ground this morning ahead of the Bank of England’s latest interest rate decision at noon today – with the market pricing in a near 65% chance of a quarter-point cut – slipping to just below $1.28 against the dollar and to around £0.8450 vis-à-vis the euro. The latter is a touch softer against the dollar, trading just north of $1.08.

US government bond yields fell further following the Fed meeting, extending their recent decline, with 2- and 10-year yields ending 10-12bps lower on the day, while US stocks held onto their earlier gains, with the Nasdaq and S&P 500 closing around 2.6% and 1.6% higher respectively.

The latest data on labour costs in the US economy will have reassured the Fed regarding the inflation outlook. The Employment Cost Index for the private sector rose by 0.9% in the second quarter, following an increase of 1.1% in Q1, and the annual increase eased further to 3.9%, the slowest pace of growth since the second quarter of 2021.

In the Euro area, the latest inflation readings surprised to the upside again. Headline inflation ticked up to 2.6% in July (from 2.5% in June) according to yesterday’s provisional data, while core inflation was unchanged at 2.9%.  The data didn’t do much to alter market expectations for ECB interest rates though, with a 25bps cut in September still almost fully priced.

Looking to the day ahead, as mentioned, the Bank of England announces its latest interest rate decision at noon. On the economic data front, manufacturing PMIs (final readings for July) are due in the main economies, while the ISM manufacturing index (July) and regular weekly jobless claims are scheduled in the US.