U.S. Indices closed lower as both stocks and Treasuries were sold on Wednesday, while the Dollar saw a notable bid in the wake of a hawkish Fed Chair Powell. In the FOMC rate decision, the central bank held rates at 4.25-4.50%, as expected, with Governors Waller and Bowman dissenting in favour of a 25bps cut, although little move was seen. In Powell’s press conference, he said no decision has been made about the September meeting, and they will not let tariffs become inflationary, because they will make sure it does not become serious by deploying their tools. In the wake of these comments, particularly the latter, US indices and T-Notes sold off to session lows, while the Dollar rose to peaks, and Fed money market pricing became more hawkish, with only 38bps of cuts seen by year-end now vs 46bps post Fed statement. As a result, all FX G10 peers saw weakness with Antipodeans and EUR lagging, as the latter continues to see a fallout from the US/EU trade deal. On trade, Trump said India will be paying a tariff of 25%, plus a penalty from August 1st, and Trump signed an EO implementing an additional 40% tariff on Brazil, bringing the total tariff amount to 50%, which hit the INR and BRL, respectively. Copper plunged 20% after Trump’s proclamation imposed a 50% tariff on imports of semi-finished copper products, whereby participants were not expecting such exemptions. Sectors were predominantly lower, with Materials and Real Estate the laggards, while Utilities, Tech, and Communications were the only sectors in the green amid a deluge of earnings, which continues after-hours with the likes of MSFT and META. Elsewhere, there were plenty of other risk events on Wednesday – BoC was largely a non-event and held rates as expected, while in the QRA, the US Treasury maintained auction sizes and guidance but adjusted its buyback programme. Regarding US data, ADP rose much more than expected ahead of payrolls on Friday, albeit it does not have the closest relationship, while GDP (Q2) topped expectations. Lastly, the crude complex was firmer on Wednesday, and gained throughout the US session and saw a boost on Trump trade headlines while US/Russia tensions continue to boil. The Fed left rates on hold at 4.25-4.50% as was widely expected, although both Governors Waller and Bowman voted to cut rates by 25bps, albeit not too surprising given both had alluded to such a move in the run-up to the blackout period. Note, Kugler did not vote at the meeting. Within the statement, it maintained that uncertainty about the economic outlook remains elevated, but removed the description seen in June that it “has diminished”. When describing the economy, the Fed said recent indicators suggest growth of economic activity moderated in H1, whereas in June, it had said that it continued to expand at a solid pace. Elsewhere, all language was maintained, noting that the unemployment rate remains low, labour market conditions remain solid, and inflation remains somewhat elevated. There was no explicit signal or hints at upcoming rate cuts either, showing the Fed is still sticking with its wait-and-see, data-dependent approach. It maintained its view that “in considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. Overall, Fed Chair Powell leaned hawkish and pushed back on calls for a September rate cut, noting there is a lot of data due before the meeting, which is why the Fed have not yet made its decision. He was also quizzed about the impact of the economy on tariffs, particularly on prices. He exclaimed that it is a reasonable base case to assume that tariffs will result in a one-time price increase, but he suggested that this is because the Fed will not allow for “serious inflation” as it would combat rising inflation by deploying its tools. Powell echoed several times that he views policy as modestly restrictive, and when quizzed about what data is needed to lower the FFR, he said that there are risks on both sides of the mandate, but if risks were fully in balance, it implies you would move to a more neutral stance. On the Fed’s mandate, Powell said that inflation is still above target while the labour market is at or near maximum employment. He said that the price stability mandate faces upside risks, while the labour market faces downside risks. However, inflation is further from their target than employment. Ahead of PCE, he sees the June headline at 2.5%, with core at 2.7%. Meanwhile, ahead of NFP on Friday, Powell said that when looking at the labour market, the unemployment rate is the main figure to watch. On the consumer, he said spending has been very, very strong for the last few years, and now maybe it has finally slowed down, but it is at a healthy level. When quizzed about the dissents from Waller and Bowman, he said it is not surprising that there are differences, and he would call this meeting one of the better meetings. The Advanced US GDP print for Q2 saw growth of 3.0%, well above the 2.4% forecast and bouncing back from the -0.5% in Q1. This is more aligned with the Atlanta Fed estimate of 2.9%, which was lifted after the prior day’s trade data. The narrowing deficit driven by a fall in imports boosted the headline, and the RSM US LLP Principal & Chief Economist Brusuelas highlighted that “once one excludes trade and inventory data, growth advanced at a much softer pace of 1.1% implied by final sales to private domestic purchasers”. While the headline beat is welcomed, the 30.3% decline in imports (prev. +37.9%) primarily reflects the increase in GDP growth, distorting the headline data. Real final sales to private domestic purchases rose 1.2% (prev. 1.9%), the weakest reading since the end of 2022. Consumer spending accelerated in Q2, rising 1.4% (prev. 1.5%), driven by 2.2% growth in goods (prev. 0.1%), although, was the slowest growth in consecutive quarters since the COVID pandemic. Slightly offsetting the rise in the headline was a decline in investments, weighed by contractions in investment for structures and residential investment, with equipment and fixed investment experiencing slowdowns. Meanwhile, PCE Prices eased notably to 2.1% (exp. 2.9%, previous 3.7%), GDP Sales rebounded sharply to 6.3% (exp. 2.5%, prev. -3.1%), and the GDP Deflator eased to 2.0% (exp. 2.1%, prev. 3.8%). The Q2 adv report highlights the significant impact Trump’s trade policies are having on import-related US data, with ongoing trade frictions between India, Brazil, and China suggesting the theme of uncertainty and volatile moves in net exports may linger in the near term. Pantheon Macroeconomics writes, stripping out goods consumption and equipment investment—affected heavily by the timing of pre-tariff purchases—would put underlying growth in Q2 at just 0.5%. “We think a GDP print close to that pace is likely in Q3, given the mounting headwinds for the economy, and we see growth remaining weak in Q4 too”. Elsewhere, Oil closed higher by 1.14% while a stronger Dollar saw Gold end Wednesday’s session with a loss of 1.4%.
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