Fed's Daly Says Time is Nearing for Rate Cuts, May Need More Than Two

Central Bank

Economic

Summary:

While that doesn't mean a September rate cut is a lock, she said, "I would lean to thinking that every meeting going forward is a live meeting to think about these policy adjustments."

San Francisco Federal Reserve Bank President Mary Daly on Monday said that given mounting evidence that the U.S. job market is softening and no signs of persistent tariff-driven inflation, the time is nearing for interest rate cuts.

"I was willing to wait another cycle, but I can't wait forever," Daly said of the Fed's decision last week to leave short-term borrowing costs in their 4.25%-4.50% range rather than cut them, as a couple of her colleagues wanted and as President Donald Trump has demanded.

While that doesn't mean a September rate cut is a lock, she said, "I would lean to thinking that every meeting going forward is a live meeting to think about these policy adjustments."

The two quarter-point interest-rate cuts that Fed policymakers back in June penciled in for this year still "look to be an appropriate amount of recalibration, and less important is, does it happen in September and December than does it happen at all...there's all kinds of permutations to get those two cuts."

Daly said there is still plenty of data including a couple of labor market and inflation reports due out before the Fed's policy-setting meeting, in September, and she's keeping an open mind.

"We of course could do fewer than two (rate cuts) if inflation picks up and spills over or if the labor market springs back," Daly said. But "I think the more likely thing is that we might have to do more than two...we also should be prepared in my judgment to do more if the labor market looks to be entering that period of weakness and we still haven't seen spillovers to inflation."

A Labor Department report Friday showed U.S. employers added just 73,000 jobs last month, and massive revisions to previously reported data showed only 33,000 jobs were added in the two prior months.

Those figures, to Daly's mind, don't mean the job market is precariously weak - in times of economic flux, she said, raw employment numbers are often less informative than ratios like the unemployment rate, which ticked up just a tenth of a percentage point in July to 4.2%.

Still, she said, looking at a broad dashboard of labor-market measures, there is "evidence after piece of evidence" that the labor market is softening quite a bit compared to last year.

"I would see further softening as an unwelcome result," she said. "I'm comfortable with the decision we made in July, but I am increasingly less comfortable with making that decision again and again."

At the same time, she said, there's no evidence that tariff-driven price increases are seeping more broadly into inflation, and if the Fed waits long enough to be certain it won't — a process that could take six months or a year, she said - the Fed will "for sure" be too late to move.

The Fed is approaching a "tradeoff space where you are trying to make a judgment about where does policy need to be to continue to put downward pressure on inflation, and where does it need to be to continue to make sure that sustainable employment can be achieved," she said. "That's why I didn't think that July was a necessary change, but I do think, increasingly, policy is not aligned."

Source: Reuters

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Manuel

Commodity

Political

Copper rose as traders continued to digest US President Donald Trump’s decision to spare the most traded form of the metal from his 50% tariff, while a deadly mine accident in Chile raised supply concerns.

Copper trading conditions started to settle on the London Metal Exchange, after the White House’s shock move last week to exclude refined metal from the newly imposed import levy. The decision sent US prices plunging by a record 22% on Thursday, pushing them back to parity with the LME’s global benchmark.

A key question now is what will happen to the huge volume of copper that’s been shipped to the US in anticipation of tariffs, with the spreads between prices in London, New York and Shanghai likely to determine whether the metal flows back out quickly or remains in US ports. On Monday, US copper futures on CME Group’s Comex were trading about 1.8% — or $176 a ton — above those on the LME, undercutting the immediate rationale for exports.

“In the past, metal flowed between the CME and LME whenever the spread between those two prices moved outside a $100-200/t band,” Bank of America analysts led by Irina Shaorshadze said in an emailed note. “As the trade flows normalize, the LME-CME spread should revert to the historical mean-reverting relationship.”

Copper traders are also on alert for supply disruptions, after six people were killed in a tunnel collapse triggered by an earth tremor last week at El Teniente, which accounts for over a quarter of Chilean mining giant Codelco’s output. Underground operations are halted and — with the company launching an investigation into the causes — it’s unclear how long the stoppage will last or whether it will trigger changes to Codelco’s output goals.

El Teniente, one of the world’s biggest underground mines, produced 356,000 tons of copper last year. That volume is equivalent to more than a month of Chinese imports of refined copper.

The stoppage at El Teniente comes as the world’s copper smelters face intense competition to secure mine supply. Treatment fees — typically the main earner for smelters — remain at deeply negative levels on a spot basis, and plants in the Philippines and Japan have cut output or closed. Even in China, where output has remained robust, there is some speculation that production is reaching a limit.

Investors are also monitoring other unexpected mine disruptions, including at the massive Kamoa-Kakula complex run by Ivanhoe Mines Ltd. in the Democratic Republic of Congo. Still, Ivanhoe executives on Friday delivered an upbeat assessment on prospects for returning that mine to previous output guidance.

LME copper prices rose 0.6% to settle at $9,687.00 a ton at 5:53 p.m. local time. Other metals were mixed, with zinc up 0.8% and aluminum down 0.5%.

Source: Bloomberg

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Manuel

Cryptocurrency

Spot Ethereum exchange-traded funds (ETFs) available in the US saw $152.3 million in outflows on Aug. 1, ending their longest streak of inflows.

According to Farside Investors’ data, the outflow amount was the largest since Jan. 8. It ended the 20-day streak of positive netflows for Ethereum ETFs, which have accumulated nearly $5.4 billion during the period.

The ended streak is not only the largest in duration, but also in total amount of inflows and average daily flow, which was approximately $270 million.

The previous record in duration was 19 days straight, which ended on June 13 and resulted in roughly $1.4 billion captured, with an average of $73 million per day.

However, it was largely eclipsed by the 18-day record that ended on December 19 and inched close to $2.5 billion, resulting in nearly $139 million per day on average.

James Butterfill, head of research at CoinShares, pointed out macroeconomic events as the likely causes for August 1 outflows. He noted last week’s statements by the Federal Open Market Committee (FOMC) and the strong economic data.

ETHA levels up

Until June 30, Ethereum ETFs registered around $4.3 billion in inflows. By adding close to $5.4 billion in positive net flows last month, Ethereum ETFs increased their flows by 126%.

BlackRock’s ETHA was the main reason behind the growth of Ethereum ETFs. As reported by Bloomberg senior ETF analyst Eric Balchunas, ETHA was the third-largest ETF by inflows in July, registering close to $4.2 billion and representing 78% of the total.

BlackRock’s Bitcoin ETF, IBIT, and Vanguard S&P 500 ETF (VOO) were the two funds besting ETHA.

Usually, Balchunas calls the high flows into VOO and IBIT as “beta with a side of Bitcoin.” Yet, he highlighted on August 4:

“Top 3 ETFs (out of 4,432) in one month flows: $VOO, $IBIT, $ETHA. I used to say ‘Beta with a side of Bitcoin’ to describe this (which was most of 2024 leaderboard) but need a new phrase, ideally an aliteration, to incl Ether. If you think of anything i’m all ears.”

As of August 1, ETHA shows over $9.7 billion in cumulative flows.

Source: Cryptoslate

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Manuel

Commodity

Energy

Oil prices fell in choppy trading as traders took stock of OPEC+’s latest bumper supply increase while US President Donald Trump stepped up threats to penalize India for buying Russian crude, raising fears of tightening global supplies.

West Texas Intermediate crude traded close to $66 a barrel after Trump’s renewed warnings of tariffs on India over purchases of Russian oil. The latest fluctuation came after oil prices hit the lowest in a week as OPEC+ endorsed an additional 547,000 barrels-a-day of output for next month.

“We still have this looming deadline for Russia to come to the table for a ceasefire with Ukraine,” said Frank Monkam, head of macro trading at Buffalo Bayou Commodities. Trump’s reiteration of possible tariffs on India for buying Russian oil “reminded the market that this whole thing is still in limbo.”

US Special Envoy Steve Witkoff is expected to visit Russia on Wednesday, Tass reported, citing people familiar with the plans. Some investors — already wary of Trump’s habit of threatening economic penalties just to reverse course days later — see the development as a clue that an agreement between Washington and Moscow may be reached before any significant penalties come to pass.

Still, the impact of any potential measures is uncertain. “The oil market is still assigning a low probability to anything meaningful from the White House as it relates to Russian oil exports,” said Pavel Molchanov, an analyst at Raymond James. “The only way to zero out Russian oil exports would be to implement a full-fledged naval blockade of the Russian coastline, which no one is seriously considering.”

Earlier in the session, Indian Prime Minister Narendra Modi struck a defiant tone in the face of Trump’s threats, signaling his country would continue to buy Russian oil. That walked back earlier gains on signs of dropping refinery run rates in the Asian country as a result of Trump’s threats against Moscow, which had stoked fears of tightness in refined-product markets.

Crude is coming off three months of gains. Prices had slumped Friday as soft US jobs data raised concern the world’s largest economy was slowing following the Trump administration’s wave of trade tariffs. While global crude stockpiles grew early in the year, much of the increase has been in China, far away from the market’s vital pricing points.

The September output hike announced by OPEC+ over the weekend stands to complete the reversal of a cutback made in 2023 by an eight-member sub-group in the alliance that includes Saudi Arabia and Russia. The progressive restoration of supplies over recent months has been widely seen as a concerted push by the cartel to reclaim market share. It’s uncertain whether additional curtailed output will be restored in the coming months, or the group will now stand pat.

The latest increase may reinforce speculation that global crude supplies will run ahead of demand into the end of the year, lifting commercial stockpiles, compressing key market timespreads, and setting the scene for a selloff.

Source: Bloomberg

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Adam

Economic

It took only a few days for the Federal Reserve’s latest decision on interest rates to age like milk.

The central bank on Wednesday said it was holding borrowing costs steady yet again, extending a wait-and-see pattern that began in January. That same day, Fed Chair Jerome Powell told reporters that a “solid” labor market means central bankers still have the luxury of waiting to see how President Donald Trump’s tariffs affect prices before resuming rate cuts that could help boost jobs but could also reignite inflation.

Just two days later, it turned out that the job market is on shakier ground than Powell had suggested. It may take a bit more time to know if that’s really the case.

But the Fed may walk away with egg on its face.

On Friday, the Labor Department reported that employers added just 73,000 jobs in July, well below the threshold of monthly job growth necessary to keep up with population growth. Meanwhile, the unemployment rate ticked up to 4.2% from 4.1%.

And the monthly report was even worse than it seems: The Labor Department also massively revised downward the job gains for the prior two months.

It’s now clear that job growth has been anemic, based on the newly revised data: The average pace of monthly job growth from May through July was the weakest than any other three-month period since 2009, outside of the pandemic recession in 2020.

The Fed declined CNN’s request for comment.

“Powell is going to regret holding rates steady this week,” Jamie Cox, managing partner at Harris Financial Group, said in commentary issued Friday.

But not everyone at the Fed shared Powell’s view on the labor market. The Fed’s latest decision generated pushback from within like it hasn’t seen in decades.

Fed Governor Christopher Waller and Fed Vice Chair for Supervision Michelle Bowman cast dissenting votes, marking the first time that more than one Fed governor has done so since 1993.

In statements issued Friday, both officials pointed to signs of weakness in labor market as a major reason why they dissented, while downplaying the potential effects of Trump’s tariffs on prices. The Fed is tasked by Congress to address both high inflation and a weakening labor market.

“The labor market has become less dynamic and shows increasing signs of fragility,” Bowman wrote, adding that just few industries have propelled job growth this year, which remained the case in July, according to the latest data.

Still, it may be too soon to conclude that the Fed has royally screwed up.

“It was a disappointing report to be sure, but when I look at the data, we try not to make too much out of any one individual report,” Cleveland Fed President Beth Hammack told Bloomberg on Friday after the July jobs report was released. “I feel confident with the decision we made earlier this week.”

Last year, after the unemployment rate climbed quickly in a short period of time and there were similar calls that the central bank was too late to lower rates, the Fed stepped in with a bold, half-point rate cut to stave off any further weakening.

By the end of last year, it turned out that the labor market wasn’t falling off a cliff: In December, employers added a massive 323,000 jobs as the unemployment rate edged down from the prior month to 4.1%.

Source: cnn

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Adam

Economic

Investors should buy into the selloff in US stocks because of the robust earnings outlook for the coming year, according to Morgan Stanley strategist Michael Wilson.

While the S&P 500 faces pressure from the weakening labor market and tariff-related inflation that may delay Federal Reserve interest-rate cuts, investors should view any pullback as a buying opportunity, Wilson wrote in a note Monday.

“The rolling recovery has begun as evidenced by our earnings revisions breadth analysis,” Wilson wrote. “While the Fed remains on hold for now, the combination of a fading inflation impulse later this year plus softness in the labor market should foster a robust cutting cycle.”

The record breaking rally in US equities came to a halt last week, with the S&P 500 swinging from posting six consecutive all-time highs to a four session losing streak. Stocks sank Friday after data showed slowing job growth and rising unemployment, and as President Donald Trump unveiled a slew of tariffs on US trading partners.

On a brighter note, the second-quarter earnings season is proving much better than expected. S&P 500 firms are on track to post a 9.1% jump in profits, far above analysts’ projection of 2.8%, according to data compiled by Bloomberg Intelligence. The share of companies beating estimates is also the highest in four years.

Goldman Sachs Group Inc. strategist David Kostin said company executives had so far sounded confident in their ability to mitigate the impact of tariffs on profits. While pressure on revenue growth from levies should increase in the second half, there should be support for stocks from mega-cap tech earnings and fiscal policy heading into 2026, he said.

At Morgan Stanley, Wilson said AI adoption, dollar weakness and tax cuts will act as tailwinds for equities. The strategist was among the most bearish voices on US stocks until mid-2024.

Source: Bloomberg

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Adam

Economic

What happened last week

Fed maintains policy stance: The Federal Reserve (Fed) held interest rates unchanged at its July meeting, citing economic uncertainties, moderating growth, and elevated inflation. Q2 gross domestic product (GDP) expanded 3.0% annualised after a 0.5% contraction in Q1, while core personal consumption expenditures (PCE) accelerated to 0.3% month-on-month in June. Governor Kugler's surprise resignation creates an opportunity for Trump to appoint a potential successor to Powell.

US labour market deteriorates: Non-farm payrolls increased by 73,000, substantially below the 105,000 consensus estimate, while the unemployment rate climbed to 4.2%. Significant downward revisions reduced June's payroll count from 147,000 to 14,000. The disappointing employment data elevated September rate cut probabilities to 95% from 40%.

China's manufacturing sector remains in contraction: Both official and private purchasing managers' indices (PMI) indicated factory activity contraction in July, driven by declining export orders and subdued domestic demand. The official PMI fell to 49.3, marking the fourth consecutive month below the 50 threshold and the lowest reading since November.

Trade policy updates implemented: The White House revised tariff schedules affecting 90+ territories, with rates ranging from 10% to 41%. Notable adjustments include South Korea (15% from 25%), India (25% from 26%), and Taiwan (20% from 32%), effective 7 August. Canadian goods face increased 35% tariffs due to inadequate progress addressing illicit drug flows.

Markets in focus

US equity retreats from record highs

Persistent inflationary pressures and deteriorating labour market conditions have intensified uncertainty surrounding Fed monetary policy trajectory. The volatility index (VIX) surged above 20 from the previous week's local trough near 14. The S&P 500 declined 2.4% while the Nasdaq 100 retreated 2.2% during the period.

Individual equity performance diverged significantly based on earnings outcomes. Four Magnificent Seven constituents reported quarterly results. Meta share prices achieved record highs following 22% year-on-year (YoY) revenue growth that exceeded expectations, supported by enhanced artificial intelligence monetisation through advertising platforms. Microsoft advanced 2% as Azure cloud services delivered 39% growth, surpassing analyst estimates. Conversely, Amazon declined 8% as AWS growth lagged key competitors Google Cloud and Azure. Apple exceeded earnings expectations driven by accelerating growth in emerging markets, particularly China, though tariff-related concerns contributed to a 2% Friday decline.

The US Tech 100 exhibits corrective wave characteristics as Thursday and Friday's decline decisively drove the index to the bottom of the ascending trend channel established in mid-May. Failure to maintain support above 22,600 may trigger testing of material level at February's peak of 22,223. However, a reversal from current levels could facilitate a challenge of new highs above 23,800.

Figure 1: US Tech 100 index (daily) price chart

Hang Seng Index surrenders previous gains

The Hang Seng Index surrendered the previous week's gains through four consecutive sessions of negative returns, driven by disappointing China PMI data. The absence of substantial economic stimulus measures from the recent Politburo meeting and uncertainties surrounding the 12 August trade truce expiration further pressured equity performance.

Currency weakness intensified negative sentiment among Hong Kong investors. The Hong Kong Monetary Authority (HKMA) conducted two interventions totalling HK$7.5 billion as the Hong Kong dollar breached its weak-side limit of HK$7.85 per US dollar under the Linked Exchange Rate System. These interventions raised concerns regarding potential Hong Kong interbank offered rate (HIBOR) increases, which could dampen margin lending appetite.

Despite the 3.5% weekly correction, the uptrend channel established from 24 April continues to govern price action. The HSI currently tests support at the channel's lower boundary, likely finding stabilisation near the 50-day moving average (SMA) at 24,195. A breach below this level could precipitate a retreat towards 23,800, while a recovery above 25,000 may drive prices towards the recent peak at 25,736.

Figure 2: Hang Seng Index (daily) price chart

Japanese yen under renewed pressure

Firm US tariff policies and hawkish Fed positioning have strengthened US dollar performance, recording the first monthly gain in 2025. Although recent US-Japan agreements provided greater clarity for the export-dependent economy, the Bank of Japan (BOJ) maintained policy rates unchanged at its July meeting. The central bank emphasised limited urgency for rate increases despite upward revisions to inflation forecasts.

USD/JPY reached four-month highs, touching 150.9 before retreating following Friday's disappointing non-farm payrolls data. The temporary breach above the 200-day SMA indicates increased probability that the prevailing bearish trend may be concluding. Critical price action in coming sessions will determine direction, with sustained movement above the SMA at 148.85 confirming trend reversal, while retreat towards 146 would suggest continued bearish momentum.

Figure 3: USD/JPY (daily) price chart

The week ahead

Critical policy decisions and trade dynamics will significantly influence global economic sentiment this week. The Bank of England's (BOE) interest rate decision on Thursday takes centre stage, with markets anticipating a 25 basis point reduction to 4.0% amid sharp labour market deceleration.

Comprehensive trade data from China and Australia will provide crucial insights into global commerce flows, with China's figures revealing manufacturing hub resilience amid ongoing trade tensions and shifting demand patterns. China's inflation data on Saturday will be particularly significant, especially the Producer Price Index (PPI), which has remained contractionary for 33 consecutive months, reflecting persistent deflationary pressures weighing on industrial sector profitability and investment decisions. Consumer Price Index (CPI) will be scrutinised for domestic demand recovery sustainability, while services PMI readings from China and the US will complete sectoral health assessments across major economies.

Corporate earnings will command significant investor attention, with technology remaining in focus through Palantir and Advanced Micro Devices results, offering insights into artificial intelligence demand trends and semiconductor market dynamics. Pharmaceutical leaders Eli Lilly and Novo Nordisk will be scrutinised for updates on blockbuster diabetes and weight-loss drug portfolios in the rapidly expanding GLP-1 market. Japanese results feature automotive leader Toyota Motor and financial services giant Mitsubishi UFJ Financial Group.

Figure 4: UK employment count vs. inflation rate