Growing expectations for Fed rate cuts
Growing expectations for Fed rate cuts over the coming months continued to dominate markets yesterday with bond yields falling and stocks chalking up further gains, though the impact on the dollar was relatively muted. The euro is hovering just below $1.17 against the US currency this morning, not much changed from yesterday morning albeit off its best levels of the day of around $1.1730. Sterling has gained ground against both the dollar and the euro though, supported this morning by stronger than expected UK second-quarter GDP data released a short while ago – it is trading just shy of $1.36 against the dollar and at a more than one-month high of just under £0.86 against the single currency.
The market is now as good as fully pricing in a 25bps cut in US interest rates at next month’s Fed meeting, and about a 75bps reduction by January next year. This contributed to a rally in bond markets yesterday – with US and German fields yields falling by 5-6bps across the curve and UK yields by just a bit less – which is continuing this morning. US equity markets gained more ground, with new highs for the S&P 500 and the Nasdaq, while European stocks added more than 1%, though some of this was catch-up with the US following the latter’s rally on Tuesday.
GDP growth in the UK came in stronger than the market expected in Q2 albeit moderating to 0.3% q-o-q from 0.7% in the opening quarter of the year. Exports and consumer spending both grew more slowly than in Q1, and business investment contracted after increasing quite sharply in the first quarter, while government spending rebounded in the quarter, accounting for more than 0.2% points of the overall increase in GDP. The economy also ended Q2 on a solid note, with GDP increasing by 0.4% in June (versus May) according to the monthly data. While the Q2 outturn was stronger than the Bank of England expected (+0.1%), this hasn’t impacted the markets’ expectation for interest rates which has recently seen the next full 25bps cut in rates pushed out to February next year.
It is a busy enough day ahead in terms of economic data. Producer prices (PPI) and weekly jobless claims are due in the US – the former will garner attention for tariff-related effects – while GDP (Q2, second estimate), employment (Q2) and industrial production (June) are all scheduled in the Euro area. The initial estimate of Euro area GDP in Q2 showed growth slowed to 0.1% q-o-q from 0.6% in the opening quarter of the year, the latter partially boosted by a front-running of exports to the US ahead of anticipated tariffs.