7.56am BST
Introduction: US treasury secretary Scott Bessent calls for half-point interest rate cut at next Fed meeting
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Global stocks rallied and US markets hit new all-time peaks after US inflation defied expectations of an uptick and stayed steady last month.
US treasury secretary Scott Bessent is now calling for a half-point interest rate cut in September.
The inflation data was a mixed bag – headline inflation held at 2.7% but core inflation, which strips out energy and food, was higher than expected at 3.1%. Even so, investors’ bets on a rate cut in September increased, as goods prices were more subdued while services inflation picked up, despite Donald Trump’s tariff hikes.
Bessent said in an interview on Fox Business yesterday:
The real thing now to think about is should we get a 50 basis-point rate cut in September.
He said that two days after the US Federal Reserve left rates unchanged on 30 July, revised data showed weaker job growth for May and June than official figures had previously indicated, suggesting the Fed “could have been cutting in June, July”.
“Cut that rate!” summed up Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
Yesterday, US inflation data was mixed, but the market reaction was not. Normally, core inflation is the measure the Federal Reserve (Fed) focuses on when deciding monetary policy. In that context, the market could have reacted by scaling back expectations of a September rate cut.
But no — investors instead increased September cut expectations, thinking that imported goods inflation remained lower than feared as companies continued to absorb tariff costs. As a result, the US 2-year yield fell after the data release, the probability of a September cut jumped to 94% from 80% beforehand, and the US dollar slipped back.
The dollar has slipped a further 0.1% against a basket of other major currencies.
Investors cheered the news, driving the S&P 500 and the tech-heavy Nasdaq to new all-time highs, up 1.1% and 1.4% respectively. Japan’s Nikkei also closed at fresh record high, 1.3% higher on the day.
Inflation in Germany eased to 1.8% in July from 2% in June, the federal statistics office confirmed this morning.
The yield on 30-year German government bonds are down today, after hitting a 14-year high yesterday. Analysts pointed to Dutch pension reforms, which are expected to reduce demand for long-dated bonds, and expectations for a big increase in German government spending as the main reasons behind Tuesday’s sell-off.
Markets are turning their attention to the summit in Alaska between Trump and Vladimir Putin on Friday to discuss ending Russia’s war in Ukraine.
The Agenda
9am BST: IEA Oil market report
Updated at 7.59am BST
