U.S. bond yields are declining as markets anticipate a Fed rate cut in September, driven by a weakening labour market. Equity markets fell, particularly small caps, reversing previous trends. WTI oil prices dropped despite Middle East tensions, while gold rose, and Bitcoin declined.

U.S. bond yields are declining across the yield curve, with the 2-year yield dropping by 3.890% and the 10-year yield by 3.793%. This decline occurs as the market fully anticipates a rate cut by the Fed in September, alongside signs of a weakening labour market that heightens concerns about an economic slowdown. The bond market is signalling that a rate cut is already on the horizon.

Equity markets experienced a downbeat week, with broad-based declines. As is often the case, small-cap companies were hit harder than the broader market. There has been a noticeable shift in how economic data is impacting market performance. In the past, negative data affecting the real economy often led to a counterintuitive rally in the markets. However, this pattern has reversed, and now adverse economic reports are leading to market declines.

The U.S. dollar remained relatively steady against the euro, with the USD/EUR exchange rate at 0.9166. WTI crude oil prices declined for the fourth consecutive week, driven by weaker-than-expected U.S. economic data and significant global economic weakness. Despite escalating tensions in the Middle East, WTI prices dropped. In contrast, gold prices rose steadily throughout the week, a common occurrence due to U.S. 10-year bond yields and global bond indices reaching their lowest levels since March. The inverse relationship between gold and bond yields, coupled with a weakened dollar due to the increased likelihood of a U.S. rate cut, contributed to this rise. Meanwhile, Bitcoin experienced a 7.21% decline over the week in the cryptocurrency market.

The Fed may cut rates in September due to easing inflation, a weakening labour market, and slowing economic indicators.

The Fed hinted at a possible interest rate cut in September, contingent on upcoming economic data, as inflation eases, and the labour market weakens. Despite maintaining its current policy, the Fed's press release and Chairman Powell's remarks suggest that a rate reduction is likely if inflation continues to decline, and employment conditions worsen. This sentiment is bolstered by the July jobs report, which revealed weak job growth and rising unemployment, heightening recession fears and fuelling expectations for more aggressive rate cuts. Additionally, deteriorating business activity, reflected in the ISM Manufacturing Index, and a stagnant housing market further underscores the need for the Fed to act, with market forecasts predicting two rate cuts this year to address the ongoing economic slowdown.

The Fed hinted at a potential September rate cut, contingent on data, as inflation eases, and the labour market softens.

The Fed maintained its current monetary policy stance but hinted at a potential rate cut in September, contingent on forthcoming economic data. Inflation appears to be moderating, the labour market is weakening, and consumer spending is decelerating. With the policy rate remaining well above the neutral level, the market anticipates a 75-basis point reduction this year, with further cuts possible in 2025. While the Fed did not explicitly commit to a September cut, the tone of the press release and Chairman Powell's remarks suggest it is a likely outcome. Powell indicated that if inflation continues to decline and labour market conditions deteriorate, a September rate cut could be justified, underscoring the Fed’s commitment to its dual mandate of maximizing employment and stabilizing prices.

Aligned with market expectations, we believe that this will be the optimal timing for a reduction, likely avoiding delays beyond the election. The ongoing economic slowdown, particularly in terms of weakening activity and employment, is expected to result in reduced growth during the second half of the year.

The weak July jobs report and rising unemployment have heightened recession fears, pushing the Fed to consider more aggressive interest rate cuts to counteract the slowing US economy.

The July jobs report shows considerable weaknesses across various metrics, raising concerns about the labour market. Although the increase in the unemployment rate is mainly attributed to a higher labour supply rather than layoffs, other indicators are troubling. Nonfarm payrolls increased by only 114,000—falling short of expectations—and private sector job gains were even lower, with 97,000 new positions created compared to the anticipated 148,000. Wage growth remains sluggish, the average workweek has decreased, and unemployment has risen to 4.3%, surpassing all market forecasts. These issues, along with rising jobless claims and weak demand indicators, increase the likelihood of a more rapid rise in unemployment, bolstering the argument for the Fed to lower interest rates.

Given these conditions, the Fed is expected to adopt a more aggressive approach to monetary easing than initially thought. The significant drop in Treasury yields and the weakening dollar reflect growing expectations that the federal funds rate will be at 3% next year. With inflation concerns diminishing, the Fed is likely to focus more on the deteriorating labour market, potentially leading to more decisive actions to address the economic slowdown.

We anticipate the Fed will act in September rather than waiting until after the election, as candidate Donald Trump suggested. The Fed needs to uphold its mandates on employment and inflation.

Fears of a U.S. economic slowdown is increasing the likelihood of Federal Reserve rate cuts.

Recent business surveys, particularly the ISM Manufacturing Index, indicate a worsening economic landscape. The July ISM Manufacturing Index revealed a significant downturn, with the index falling to 46.8, marking the 20th time in 21 months that it has dropped below the neutral 50-point threshold. Employment in the manufacturing sector showed pronounced weakness, plummeting to 43.4, its lowest level since the height of the pandemic. Meanwhile, input prices for factories rose at a quicker pace (52.9 compared to 52.1), although the increase did not pose substantial risks. These data points, combined with sluggish new orders and output, have intensified market expectations that the Fed will implement rate cuts, with current pricing indicating more than 75 basis points of reductions anticipated this year.

We anticipate that the Fed will lower interest rates at its September meeting. Given the ongoing economic decline, we believe the Fed should act without further delay.

Pending home sales rose slightly in June but remain below last year’s levels; buyers are cautious amid high prices and rates.

Pending home sales rose by 4.8% in June, marking a rebound after two months of consecutive declines. Despite this increase, pending home sales are still 2.6% lower compared to the same time last year. Mortgage rates fell by 14 basis points in June, and an uptick in inventory helped draw some buyers back into the market. Besides, purchase mortgage applications—another leading sales indicator—also increased in June but have since decreased in July. Buyers remain cautious due to affordability issues, with mortgage rates still close to 7% and house prices reaching new national highs. The payment-to-paycheck ratio remains unfavourable for many, as pending home sales are down 5.7% YoY and have plummeted 31.5% from three years ago, reflecting a market that is notably stagnant compared to the typical peak season.

We expect that the housing market will not recover until 2025 when falling interest rates are expected to lower mortgage rates and stimulate market activity.