US equity futures are higher led by small caps (again) as the CPI print induces further short covering ahead of a now certain September rate cut, and a beta chase. As of 8:15am, S&P 500 and Nasdaq 100 futures were 0.2% higher after both indexes closed at fresh record highs on Tuesday, but were comfortably outpaced by the Russell 2000 index, as smaller companies were lifted by a largely benign inflation reading. Pre-mkt, Mag7 and semis are higher with Cyclicals outperforming Defensives, ex-Energy. Bond yields are lower as the curve bull flattens and USD weakens; the market strengthens its view on rate cuts in Sep, Oct, and Dec. Bessent calls for a 50bp cut in Sep. Today’s macro data focus is on mtge apps ahead of tmrw’s PPI which should help solidify PCE views.
In premarket trading, Mag 7 stocks were mostly higher (Tesla +0.4%, Meta +0.2%, Alphabet +0.2%, Microsoft +0.09%, Amazon +0.1%, Apple +0.1%, Nvidia -0.2%).
Stocks were set for another day of record highs, as money markets suggest a September Fed interest rate cut is all but nailed on after a goldilocks CPI report that showed less tariff price pressures. The data has bolstered bets that the Fed will resume rate cuts next month and act more aggressively to shield a labor market showing signs of strain. At the same time, the VIX gauge hits its lowest level this year as optimism over a softening rate stance is further buoyed by easing global trade tensions and a significantly stronger-than-expected US earnings season. Swaps are pricing in about a 95% chance of a quarter-point cut in September, up from about 80% before Tuesday’s inflation data, with at least three more similar moves expected by June.
“The bull case remains a convincing one, with earnings growth solid, and a cooler tone on trade continuing to prevail, all the while dovish policy expectations help to provide a cushion against any worries that the economy may be softening,” said Michael Brown, senior research strategist at Pepperstone.
US Treasury Secretary Scott Bessent told Bloomberg TV that rates should likely be 150-175 basis points lower. “We could go into a series of rate cuts here, starting with a 50 basis-point rate cut in September,” he said.
US equities have staged an astonishing rebound from their April lows, when US President Donald Trump’s tariffs upended markets. The S&P 500 is closing in on a 10% advance for the year, with most of the fresh gains coming in the past two months.
The volatility that has defined much of this year’s trading has eased, with the VIX falling to its lowest level since December. Treasury market swings have also subsided, as the ICE BofA MOVE Index, a measure of expected yield fluctuations, dropped to its lowest since January 2022.
“Quite simply there is a momentum drive higher here,” said Guy Miller, chief market strategist at Zurich Insurance Co. “The US economy is in stronger shape than many had expected and the risk of recession is continuing to diminish. Markets can go even higher.”
Investors will be watching US PPI on Thursday and retail sales the following day for fresh clues on how the US economy is holding up. Atlanta Fed President Raphael Bostic and Chicago Fed President Austan Goolsbee are scheduled to speak later Wednesday.
Europe's Stoxx 600 rose 0.4%, tracking gains in Asia after a record close on Wall Street. Technology, personal care and health care lead in Europe, while energy and travel lag. US equity futures also edge higher. Glanbia jumps on lifted guidance, with Nordic Semiconductor also advancing, while Demant, Sixt and Persimmon all lost ground. Here are the biggest movers Wednesday:
Earlier in the session, Asian equities advanced, with Hong Kong and Japan helping to lead the charge, as bets on Federal Reserve rate cuts fueled investor appetite for risk assets. The MSCI Asia Pacific Index rose as much as 1.5%, poised for a third day of gains and touching its highest since February 2021. Tencent was among the biggest boosts before its earnings report, along with TSMC and Alibaba. Gains were also notable in Thailand and South Korea, while benchmarks in Taiwan and Indonesia flirted with record highs. The Hang Seng Tech Index jumped more than 3%, with regional tech stocks also getting a lift from the Nasdaq 100’s climb to a fresh record overnight. Meanwhile, Chinese shares extended their recent strength even amid a lack of major catalysts, with ample domestic liquidity cited as a tailwind for the market. The upbeat mood came after a modest rise in US prices eased concerns that trade-related costs could spill over into broader price pressures. That drove expectations for easier Fed policy, with money markets nearly pricing in a full 25 basis point reduction next month. Here Are the Most Notable Asian Movers
In FX, the Bloomberg Dollar Spot Index falls 0.4%, extending its post-CPI fall as traders boost bets on an interest-rate cut by the Fed in September. The pound, kiwi and Swedish krona gain 0.6% each against the greenback.
In rates, Treasuries climb, pushing US 10-year yields down 3 bps to 4.25% with short-end tenors extending their post-CPI rally and long-end outperforming, pulling 2s10s and 5s30s spreads from Tuesday’s highs US yields richer by 2.5bp to 4bp across tenors with the curve flatter, tightening 2s10s and 5s30s spreads by 1.3bp and 0.5bp; 10-year, down nearly 4bp at 4.25% near session low, trails Germany’s by about 1bp. European government bonds also advance. As dust settles from Tuesday’s July CPI data, Fed-dated OIS contracts price in around 23bp of easing for the September policy meeting and a combined 61bp over this year’s three remaining meetings. In SOFR options, recent activity has included demand to hedge risk of a 50bp cut in September
In commodities, WTI crude futures fall 0.4% and below $63 a barrel and Brent dropped to $66 a barrel after the International Energy Agency said oil markets are on track for a record surplus next year as demand growth slows and supplies swell. Spot gold climbs $15 as the metal, which pays no interest, typically benefits from a lower rate environment.
Looking to the day ahead now, and it’s a quiet one on the calendar, but central bank speakers include Barkin (8am), Goolsbee (1pm) and Bostic (1:30pm) and earnings releases include Cisco.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly higher as the region took impetus from the gains stateside where CPI data was not as hot as feared and kept a September Fed rate cut on the table. ASX 200 bucked the trend and was dragged lower by underperformance in Utilities and the top-weighted Financial sector, with the latter suffering amid losses in CBA post-earnings. Nikkei 225 continued its advances and rallied to fresh record highs above the USD 43,000 level, while the somewhat varied PPI data from Japan had little influence on price action. Hang Seng and Shanghai Comp were underpinned alongside the mostly upbeat mood across the Asia-Pac region and with a briefing by Chinese officials on supporting consumption, while China had announced on Tuesday to provide interest subsidies for qualifying personal consumption loans in the country's latest effort to boost consumption.
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European bourses (STOXX 600 +0.4%) opened modestly firmer across the board and have continued to gradually march higher as the morning progressed; currently just off session highs. European sectors hold a strong positive bias, with only a handful of sectors residing in the red. Tech takes the top spot, joined closely by Healthcare and Utilities; the latter boosted by post-earning upside in E.ON (+1%), where the Co. reported strong H1 metrics and affirmed its guidance. For Healthcare, Novo Nordisk (+1%) benefits from a broker upgrade at BNP Paribas. Travel & Leisure is found right at the foot, dragged down by Swedish-listed Evolution (-8%). Interestingly, Bloomberg reported that the Co. is under investigation for running black-market activities in banned countries, some of which were/are sanctioned by the US (Iran/Syria).
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Geopolitics: Middle East
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Central Bank speakers
DB's Jim Reid concludes the overnight wrap
Markets posted a fresh risk-on move yesterday, with the S&P 500 (+1.13%) at an all-time high after the US CPI print raised expectations for a Fed rate cut next month. Ironically given the market rally, there were some concerning signs in the release, including the fastest core CPI reading in six months. But for investors, the fear was that an even hotter number would remove the prospect of a September rate cut altogether, particularly if the tariff impact became more obvious. So the fact that CPI was broadly as expected was met with relief, leading to equity gains and tighter credit spreads as investors became increasingly confident about another rate cut.
In terms of the details of that inflation report, headline CPI was at a monthly +0.20% pace for July, which kept the year-on-year rate at +2.7% (vs. +2.8% expected). But although the headline number looked fine, the headline measure was being dragged down by gasoline prices, which fell by a monthly -2.17%. So the core CPI measure (which excludes food and energy) was up by a stronger +0.32%, which pushed the year-on-year rate up to +3.1% (vs. +3.0% expected). So that was a bit more concerning, and the stickier category of core services was running at +0.36%.
But even as core CPI was accelerating, markets were reassured because the tariff impact on inflation didn’t look so obvious this time. For instance, back in June the household appliances category had its biggest monthly price jump on record (+1.9% on the month), but it then fell back -0.9% in July. Similarly, toys had surged by +1.3% in May and +1.8% in June, before only rising by +0.2% in July. So for now at least, it doesn’t look like 2021, when supply-chain kinks after the pandemic led to a huge surge in core goods prices.
When it comes to analysing the tariff impact, it’s also worth noting that the effective tariff rate has fluctuated significantly in recent months, and hasn’t moved up in a straight line, so that’s also making it trickier to gauge the full impact. After all, we had the 10% baseline imposed after Liberation Day, but we then had a big tariff reduction in May after the levies on China came down by 115%, and in the last couple of weeks we’ve then had fresh tariffs imposed like 15% on the EU, 35% on Canada, and 50% on copper. So when it comes to the impact on inflation, it may be some time before we get a clear signal, as several tariffs were imposed as recently as August 7, whilst there are potentially more in the pipeline like pharmaceuticals and semiconductors.
For now at least, the main takeaway was for the Federal Reserve, as investors dialled up the likelihood of a 25bps rate cut in September to 96% by the close last night, up from 88% the previous day. It was the same story for the coming months as well, with 105bps of cuts priced in by the June 2026 meeting at the close, up +4.4bps on the previous day. That also came alongside fresh commentary from the administration, as Treasury Secretary Bessent suggested the Fed ought to be open to a larger-than-usual cut, saying “The real thing now to think about is should we get a 50bp rate cut in September”. In their CPI recap, DB’s US economists think that the release isn’t likely to move Fed officials from their priors in either direction, and that the upcoming labour market data will be more important with respect to near-term cuts. See their full reaction here for more details.
That Fed repricing yesterday was accompanied by a decent steepening in the yield curve, with the 2yr yield down -3.7bps to 3.73%, whilst the 10yr yield (+0.4bps) moved up to 4.29%. In fact, the 2s30s curve (+6.4bps) steepened up to 115bps, the steepest it’s been since January 2022. And the prospect of rate cuts proved to be very good news for US equities, particularly in the more cyclical sectors, with new record highs for the S&P 500 (+1.14%), the NASDAQ (+1.39%) and the Magnificent 7 (+1.15%). The advance was a broad one, with all eleven major S&P 500 sector groups higher on the day and the small cap Russell 2000 (+2.99%) having its best day in three months.
With markets pricing more rate cuts over the months ahead, that also caused the dollar index (-0.43%) to weaken yesterday. Moreover, that weakness got further momentum after Fox Business reported that Trump’s nominee to be commissioner of the Bureau of Labor Statistics, EJ Antoni, had recently said that they could suspend the monthly jobs report. In the interview, he said that “Until it is corrected, the BLS should suspend issuing the monthly job reports but keep publishing the more accurate, though less timely, quarterly data”. Antoni still needs to be confirmed by the Senate, although when White House Press Secretary Karoline Leavitt was asked about whether the monthly schedule would continue, she said “I believe that is the plan, and that’s the hope, and that these monthly reports will be data that the American people can trust.”
Meanwhile in Europe yesterday, markets put in a relatively weaker performance, with both bonds and equities underperforming their US counterparts. Weaker-than-expected data didn’t help matters, and the ZEW survey from Germany showed the first decline in expectations since April, back when the Liberation Day tariffs were introduced. That expectations component was down to 34.7 (vs. 39.5 expected), whilst the current situation measure was down to -68.6 (vs. -67.0 expected), which was the biggest monthly fall for the current situation since August 2023.
That dampened sentiment in Europe, and even though the STOXX 600 (+0.21%) managed to advance, the DAX (-0.23%) fell back for a third consecutive session. There were bright spots however, and the overall risk-on tone did see European HY spreads reach their tightest level since 2018 (-3bps to 269bps). Meanwhile, there was a fresh move higher in long-end borrowing costs, with 10yr German bund yields (+4.7bps) rising to 2.74%, their highest since March.
Moreover, the 30yr German yield (+7.3bps) moved up to a post-2011 high of 3.29%, so that adds to the recent theme of global long-end bonds coming under pressure given the fiscal outlook. And this selloff was echoed across Europe, as yields on 10yr OATs (+5.3bps) and BTPs (+4.5bps) also moved higher.
Here in the UK, 10yr gilts (+6.1bps) underperformed and sterling strengthened +0.51% against the US Dollar after the latest employment data was a bit stronger than expected. It still showed payrolled employees were down -8k in July, but that was fewer than the -20k decline expected by the consensus, and the previous month was also revised to show a smaller contraction. So that led investors to dial back the likelihood of rate cuts from the Bank of England, with the pricing for a cut by November down to 44% by the close.
Overnight in Asia, the risk-on sentiment has continued this morning, with the Nikkei (+1.57%) up to another record high, whilst the Shanghai Comp (+0.56%) is currently on track for its highest closing level since September 2021. That’s been echoed across the region, with gains for the Hang Seng (+1.8%), the CSI 300 (+0.92%) and the KOSPI (+0.61%) as well. That said, we have seen some bond market weakness in Japan this morning, as their 5yr auction had its weakest demand ratio since 2020, and the 5yr yield is up +2.9bps this morning. That comes as PPI inflation was also a bit stronger-than-expected overnight, only falling back to +2.6% year-on-year in July (vs. +2.5% expected).
To the day ahead now, and it’s a quiet one on the calendar, but central bank speakers include the Fed’s Barkin, Goolsbee and Bostic, and earnings releases include Cisco.