Fed keeps rates on hold again

The US Federal Reserve kept rates on hold once again yesterday, leaving the upper bound of the Fed funds rate at 4.50%. The decision was not unanimous, with two FOMC members voting for a 25bps cut, the first public double dissension in decades. Nevertheless, the message from the Fed was broadly unchanged and hopes that Chair Powell might give a dovish bias for the next meeting in his commentary were left unrealized. Powell maintained that the economy was in a good position, saying that it was ‘not performing as though restrictive policy is holding it back’, though he acknowledged mounting risks to the labour market ahead of the NFP print this week. On the other hand, the ongoing uncertainty around tariffs and their potential impact on inflation was noted once again, with Powell saying that ‘there are many, many uncertainties left to resolve.’

The US GDP print for Q2 would support Powell’s point as it expanded 3.0% q/q annualised, following the 0.5% contraction in Q2. The numbers for both quarters were significantly impacted by the tariffs policy as a surge in imports in Q1 as importers looked to get ahead of any incoming levies weighed on growth for that quarter, and this was subsequently unwound in Q2. For the first half, growth averaged 1.3%, suggesting that underlying momentum is weaker than it was last year. Consumer spending was up 1.4% in Q2, up from 0.5% in Q1, but weaker than seen in 2024.

Labour market data from the US so far this week has been mixed with a greater than expected decline in job openings counterbalanced by the ADP report yesterday which showed a 104,000 gain in private sector payrolls, beating the predictand ed 76,000, while the previous month’s fall was revised down to 23,000, from 33,000 previously. The NFP print is due on Friday where a net gain of 104,000 is predicted.

Tariff uncertainty remains ahead of the August 1 deadline tomorrow, but the US has announced several new deals. South Korea will face a 15% tariff, including on cars, and an investment in a US fund. Commerce Secretary Howard Lutnick has said that deals have been reached with Thailand and Cambodia. And India will face a 25% tariff along with the threat of further sanctions around imports of Russian energy, though talks are reportedly still ongoing.

The Eurozone also announced Q2 growth yesterday. It logged q/q growth of 0.1% in the second quarter, modestly stronger than the predicted flat growth. The performance was boosted by stronger-than-expected performances from Spain and Germany, but Germany contracted as the manufacturing sector remained under pressure, and Italy also saw GDP fall. The trade agreement reached with the US last weekend does provide a modicum of greater certainty which could encourage a pick-up in activity through the coming months, though many details still need to be agreed and some European leaders have been talking down the deal already.

China’s manufacturing PMI fell to 49.3 in July, down from 49.7 previously. Non-manufacturing was just above the neutral line at 50.1, down from 50.5.

Today’s Economic Data and Events

10:45 France CPI inflation, % y/y, July. Forecast: 1.0%

11:00 Turkey current account balance, USD, June. Forecast: -8.20bn

Fixed Income

• USTs sold off yesterday after Jerome Powell’s comments were less dovish than had been hoped in some quarters. Yields on the 2yr rose 7bps to 3.9406%, while the 10yr yield closed at 4.3700%, up 5bps.
• Market pricing on a September cut has declined following the Fed meeting yesterday, with the likelihood now at 44%, down from 60% previously.
• The Bank of Canada left its benchmark interest rate on hold at 2.75% yesterday, as had been widely anticipated.

FX

• The dollar index closed higher for the fifth straight session yesterday following the Fed’s meeting, rising 0.9%.
• The Euro remained under pressure following the deal agreed with the US last weekend, closing down 1.2% to 1.1405, while GBP dropped 0.9% to 1.3237. JPY weakened by 0.7% to 149.51.

Equity Markets

• US equity markets were mixed yesterday but some strong earnings projections during results season offset some of the impact of an equivocal FOMC meeting, especially for the tech-heavy NASDAQ which closed up 0.2%. The S&P 500 fell 0.1%, while the Dow Jones closed 0.4% lower.
• Locally, the ADX added 0.1% while the DFM closed 0.5% higher. Saudi Arabia’s Tadawul added 0.8% on the day.

Commodities

• New sanctions imposed on Iran, along with threats to India around its import of Russian oil, have heightened supply concerns and oil prices closed up for a third straight session.
• Brent futures added 1.0% to USD 73.2/b while WTI was up 1.1% to USD 70.0/b.