U.S. Indices closed higher on Wednesday, but small caps continued to surge while the NASDAQ closed marginally higher. The outperformance in the Russell was led by more dovish rate cut bets, which were bolstered by Treasury Secretary Bessent advocating for a 50bps move in September. Money markets now fully price in a 25bp rate cut in September. Meanwhile, the Treasury Secretary also announced that there are 11 candidates for Fed Chair, all of whom have now been named, but some suggest that they are interviewing a wide range of candidates is a tactic to put pressure on the Fed. Note, a lot of the candidates who have been interviewed are calling for lower rates and/or are critical of the Fed. T-notes rallied throughout the session but pared ahead of settlement, almost completely paring the post-CPI downside in the long-end. In FX, the Dollar was weighed by lower yields while G10 FX performed well, particularly GBP and NZD. Crude prices settled red but well off the earlier lows. Weakness was seen in the wake of the inventory data but pared into settlement with eyes on the Trump/Putin meeting. The White House has been tempering expectations ahead of the meeting, but Trump suggested there will be a second, more important meeting if the first goes well. Gold prices benefited from the weaker dollar and lower yields on prospects of a more dovish Fed. Fed Member Bostic sees one rate cut in 2025 as appropriate, but it is predicated on the labour market staying solid. Bostic feels like they have the luxury today to wait to make a policy adjustment because the labour market remains strong. On consumers, he said low-to-moderate income consumers are still facing some stress, which is starting to move up the income scale, but upper-income consumers are still ok. The Atlanta Fed President added that they know a lot more people are using credit cards to buy things that they weren’t before, which signals something about where the consumer is. Meanwhile, Goolsbee the Chicago Fed President said that Fed meetings coming up are live. He noted that tariffs are a stagflationary shock, and he is uneasy about the view of tariffs as a one-time shock that creates only transitory inflation. He added there would be more of a concern if they started getting more reports like the latest CPI report, where components not tied to tariffs are rising. He stressed he does not like pre-committing on rates, and the Fed will still get inflation readings before the next meeting. On the labour market, he said, sharply lower job gains may reflect the transition period on immigration and may just be a sign of a drop in population growth. He described the labour market as pretty solid. He also noted that if inflation goes the wrong way, the Fed will have to act, but at the same time, there are some warning signs in the labour market, and they will need to keep an eye on that as well.
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