Beige Book Report: U.S. Economic Activity Records Modest Growth Amid Ongoing Inflation Concerns
The latest Beige Book report, released on Wednesday by the Federal Reserve,
indicated that U.S. economic activity experienced slight growth across most districts.
Three regions reported moderate to average growth, offsetting flat or slightly declining activity in two others.
The report, based on information collected from the 12 Federal Reserve districts, is published eight times a year.
The report highlighted a moderate improvement in growth expectations across most regions and sectors.
Businesses expressed cautious optimism about the economy, anticipating an increase in demand over the coming months.
Price increases were generally modest across the Federal Reserve districts.
The report also noted growing challenges for businesses in passing higher costs onto customers.
Input prices were rising faster than selling prices for most companies, resulting in narrower profit margins.
Additionally, businesses expect the current pace of price growth to persist,
with several districts emphasizing that tariffs remain a significant risk to inflation.
Inflation Concerns and Monetary Policy
In a speech delivered in Washington this week, Federal Open Market Committee (FOMC) member Christopher Waller acknowledged
that recent data suggests the fight against inflation might slow at a level significantly above the 2% target.
However, he expressed confidence that inflation will continue its downward trend over the medium term.
Based on current data and forecasts, he indicated a preference for supporting a rate cut at the upcoming December meeting.
Market Expectations for Rate Cuts
The Federal Reserve is set to hold its final monetary policy meeting of the year on December 17–18.
Markets currently estimate a 77.5% probability of a 25-basis-point rate cut during the upcoming meeting.
Beige Book Report: U.S. Economic Activity Records Modest Growth
Revised Interest Rate Cut Expectations for 2025 Amid Trump’s Victory and Inflation Concerns
The outlook for interest rate cuts in the United States for 2025 has undergone significant changes following Donald Trump’s recent victory in the presidential election. This comes alongside remarks from Federal Reserve Chair Jerome Powell, which have heightened concerns among major banks such as Barclays and Toronto-Dominion (TD) regarding inflation and future economic policies.
The U.S. Federal Reserve recently lowered the overnight lending rate by a quarter-point, bringing it to a range between 4.5% and 4.75%.
Although the outlook previously anticipated continued cuts throughout 2025, many banks have reconsidered this direction following the election results.
Impact of Trump’s Policies
Both Barclays and Toronto-Dominion forecast that Trump’s new policies, which may include stricter immigration controls and higher tariffs, could lead to increased inflation.
These policies may prompt the Federal Reserve to slow down its interest rate cuts, directly impacting the country’s economic trajectory.
Revised Bank Expectations
Regarding 2025, TD Bank adjusted its forecast after Trump’s victory, predicting that the Federal Reserve will keep interest rates steady in the first half of the year before resuming cuts later.
Meanwhile, Barclays reduced its expectations for rate cuts from three times to twice, citing anticipated inflation increases and economic slowdown.
Jerome Powell’s Remarks
In his latest comments, Jerome Powell indicated that the Federal Reserve might proceed with greater caution to avoid rushing into decisions about when to stop lowering interest rates.
This statement led banks like Goldman Sachs to adjust their forecasts, now predicting additional quarter-point cuts through June 2025.
Conclusion
With expectations shifting after Trump’s win, the future of U.S. economic policies remains uncertain.
The Federal Reserve is expected to remain cautious in its interest rate decisions to mitigate potential negative effects on inflation and economic growth in the United States.
Revised Interest Rate Cut Expectations for 2025 Amid Trump’s Victory and Inflation Concerns
The Dollar Records Its Best Performance Since 2022 as Rate Cut Expectations Decline
The US dollar continues to gain strong momentum, nearing its best performance in over two years. These gains have been driven by the resilience of the US economy, prompting investors to reconsider their previous bets on significant interest rate cuts by the Federal Reserve.
The Bloomberg Dollar Spot Index has risen for the eighth consecutive day, on track to achieve its longest winning streak since April 2022. The dollar reached its highest level since mid-August, following unexpectedly strong US employment data released last week, which led markets to reduce their expectations for an additional 50-basis-point rate cut by the Federal Reserve this year.
Markets have continuously adjusted their expectations regarding monetary policy, as a series of robust economic data pointed to greater resilience in the US economy. This reduced the need for large interest rate cuts, especially amid slowing inflation. Erik Weitenus, Head of Investment Strategy at JPMorgan Private Bank for EMEA, noted that the US economy demonstrates “remarkable resilience,” which bolsters the appeal of US assets.
Increased Demand for the Dollar
Since the beginning of the year, the dollar has strengthened against all G10 currencies, except for the British pound. It posted notable gains against both the pound and the euro, with the dollar index rising by 2% over the past eight days.
Major companies and hedge funds have increasingly purchased the dollar against key currencies like the British pound and the Japanese yen. Demand for euro options contracts, expecting a decline in the euro, has surged since the release of the US employment data. Additionally, sentiment regarding the upcoming US elections has become more optimistic for the dollar, further boosting its strength against major currencies.
Neil Jones, Managing Director at TJM Europe, pointed out that long-term investors, particularly in Asia and the Middle East, have started selling the euro and British pound, abandoning their previous expectations for rising prices in those currencies.
As a result, the dollar appears to be in a strong position to maintain its gains, amidst shifts in monetary policy and changes in the global economic landscape.
The Dollar Records Its Best Performance Since 2022 as Rate Cut Expectations Decline
Goldman Sachs: Stocks Set to Benefit from Slowing Wage Growth
According to Goldman Sachs Group Inc., stocks with high labor costs are well-positioned to benefit
as wage growth slows, providing a boost to profit margins.
According to the bank’s recent analysis, wage growth in the U.S. labor market has slowed to 3.9%,
down from a peak of 6% in August 2022, and is expected to remain steady through 2026.
This easing of wage pressures comes as the labor market rebalances, with fewer companies reporting labor shortages during earnings calls. Goldman Sachs notes that the “slackening labor market” is supported by both macroeconomic data and corporate commentary, as the percentage of S&P 500 companies discussing labor shortages is now at its lowest level since 2019.
The bank also highlights that labor costs currently account for 12% of total revenues for the overall S&P 500 index and 14% for the median stock. It estimates that a 100-basis point change in labor costs would impact the earnings per share (EPS) of the S&P 500 by 0.7%, with some sectors more sensitive than others.
For example
the consumer staples sector, where labor costs account for 9% of revenue and EBIT margins are relatively low, could see a 1.0% increase in EPS if wage growth continues to slow. In contrast, the information technology sector would see only a 0.5% increase in EPS, even though labor costs represent 18% of sales, due to its high EBIT margins of 32%.
Moreover, Goldman Sachs reflects on the recent market performance of labor-cost-sensitive stocks.
A neutral basket of S&P 500 stocks with the highest labor costs has outperformed its low-labor-cost counterpart by 70 basis points year-to-date, with the greatest outperformance since July.
The note states, “This suggests that investors are confident that corporate earnings pressures from wages will continue to ease.”
Goldman Sachs analysts added, “Stocks with high labor costs should continue to outperform those
with lower labor costs as wage growth continues to decelerate.”
The bank expects wage growth to decline to around 3% and remain steady through 2026.
Additionally, downside risks in the labor market may further reduce wage pressures.
Currently, stocks with high labor costs are trading at only slightly higher price-to-earnings (P/E) ratios compared to low-labor-cost stocks,
and Goldman Sachs notes that valuations have not been a strong predictor of future returns.
Goldman Sachs: Stocks Set to Benefit from Slowing Wage Growth
Gold Prices Near Record Level After Confirmed Rate Cut in September: Gold prices stabilized near their record high after Federal Reserve Chairman Jerome Powell
confirmed expectations that the U.S. central bank would begin cutting interest rates next month.
From China to the U.S.: Important Economic Indicators Released This Week
This week, U.S. inflation figures will reinforce the reality that long-awaited interest rate cuts are coming soon,
Consumer spending data is seen as a sign that the central bank has managed to keep growth on track.
Economists expect the Core PCE Price Index, the Federal Reserve’s preferred measure of core inflation,
to rise by 0.2% in July for the second consecutive month.
This would increase the annual core inflation rate to 2.1% over three months, slightly above the central bank’s 2% target.
In the report due next Friday, Bloomberg economists expect consumer spending,
unadjusted for price changes, to increase by 0.5%—the most robust rise in four months.
Gold Prices Near Record Level After Confirmed Rate Cut in September
Gold prices stabilized near their record high after Federal Reserve Chairman Jerome Powell
confirmed expectations that the U.S. central bank will begin cutting interest rates next month. Gold was trading near $2,510 per ounce after rising 1.1% on Friday.
On Friday, Powell stated in Jackson Hole, Wyoming, that “the time has come” to shift to monetary easing.
He also emphasized his intention to prevent a further slowdown in the U.S. labor market.
Lower interest rates typically enhance the appeal of gold, which yields no return, compared to Treasury bonds.
The precious metal’s prices have surged more than 20% this year,
partly due to optimism that the Federal Reserve is nearing the long-awaited pivot toward rate cuts.
Prices have also been supported by demand for safe-haven assets amid rising geopolitical risks
and uncertainty ahead of the U.S. elections in November, as well as central bank and Asian consumer purchases.
The Chinese Central Bank Keeps Interest Rates Unchanged After Bond Surge Warning
The Chinese central bank kept its key interest rate unchanged,
ignoring the bond market frenzy as it sought to support the economy.
The People’s Bank of China maintained the one-year loan prime rate,
the Medium-Term Lending Facility rate, at 2.3%, following a 20 basis point cut in July.
Meanwhile, the central bank withdrew a net 101 billion yuan ($14 billion) from the banking system
this month after 401 billion yuan worth of loans (previously granted to the banking sector) matured on August 15.
Gold Prices Near Record Level After Confirmed Rate Cut in September
The Strait of Hormuz Reignites Concerns: Iran’s threats to punish Israel for the assassination of Ismail Haniyeh,
the leader of the Palestinian Hamas movement in Tehran
has once again raised fears of potential risks to the Strait of Hormuz.
Iran’s threats to retaliate against Israel for the assassination of Ismail Haniyeh,
the leader of the Palestinian Hamas movement in Tehran,
has once again sparked fears about the security of the Strait of Hormuz.
The Strait of Hormuz, bordered by Iran to the north and the UAE and Oman to the south,
is crucial for global oil trade.
According to Bloomberg data, tankers shipped approximately 15.5 million barrels per day of crude oil
and condensate from Saudi Arabia, Iraq, Kuwait, the UAE, and Iran through the strait in the first quarter of 2024.
The strait is also vital for liquefied natural gas (LNG),
as more than a fifth of the world’s supply—mainly from Qatar—passed through it during the same period.
China Keeps Key Interest Rates Unchanged
China has kept its key loan interest rates unchanged, per market expectations.
Beijing maintained the one-year loan prime rate at 3.35% and the five-year loan prime rate at 3.85%.
Most new and outstanding loans in China are based on the one-year loan prime rate,
while the five-year rate influences mortgage pricing.
In July, China surprised markets by lowering
its short- and long-term key interest rates for the first time in nearly a year,
signaling policymakers’ intent to boost economic growth.
Trump Vows to Raise Tariffs on Imports if He Returns to the White House
Former U.S. President and Republican presidential candidate Donald Trump
has reiterated his intention to increase tariffs on imported goods despite criticism from Vice President Kamala Harris,
his rival on the Democratic ticket.
Harris described the plan as “Trump’s tax,” which would lead to higher consumer prices.
Her criticism aligns with many economists who argue that raising tariffs would impose a financial burden on ordinary consumers,
as the cost of imported goods will likely rise.
Nevertheless, Trump insists that his plan will not negatively impact consumers despite widespread concerns.
Wall Street Indices Rise Amid Rate Cut Expectations Following Inflation Report: S&P 500 Climbs for Fifth Consecutive Day, Recording the Longest Winning Streak in Over a Month
Markets Bet on Less Than 35 Basis Points Rate Cut in September
Wall Street indices rose amid sustained bets that the Federal Reserve will begin cutting interest rates in September,
following a U.S. inflation report that aligned with expectations.
The S&P 500 index (S&P 500) climbed for the fifth consecutive day,
achieving the longest winning streak in over a month.
Most major sectors, led by financials and energy, also rose.
Meanwhile, Treasury yields remained within narrow ranges, and the dollar’s value stayed near its lowest levels in four months.
The Consumer Price Index (CPI) showed a trend toward price contraction,
relieving markets that are still reeling from last week’s downturn.
With a weakening labor market, the Federal Reserve is widely expected to start cutting interest rates next month,
However, upcoming data will likely determine the extent of the expected cut.
Expected Rate Cut Amount
Chris Larkin from E*Trade, a subsidiary of Morgan Stanley, said,
“The CPI may not have been as strong as the Producer Price Index (PPI) released yesterday,
but it likely won’t alter the overall picture.”
The main question is whether the Fed will cut interest rates by 25 or 50 basis points next month.
If most data over the next five weeks indicates economic slowing,
the central bank might opt for a more significant rate cut.
On the other hand, Krishna Guha from Evercore said that while the CPI for July wasn’t perfect,
it was good enough as it aligned with the quieter inflation data favored by the Federal Reserve.
He pointed out that the central bank has shifted its focus to broader outlooks and risk balance,
with negative employment risks dominating since the July jobs report.
He emphasized that “the Fed is now prioritizing labor data over inflation data,
and upcoming labor market data will determine how aggressively the Fed proceeds with rate cuts.”
The S&P 500 hovered around the 5455-point level, while the performance of major stocks was mixed,
with Nvidiaand Alphabetshares declining. The “fear gauge” in Wall Street—VIX—continued its decline,
falling to 16 points after an unprecedented spike to 65 points last week.
Meanwhile, 10-year Treasury yields decreased by one basis point to 3.83%.
Swap traders expect a rate cut of less than 35 basis points in September.
Green Light for Rate Cut
Mark Hackett from Nationwide said that “calming macro concerns” are among the factors creating better conditions for stocks,
noting that the pressure from market declines has now “faded into oblivion.”
According to strategists at TD Securities, led by Oscar Munoz and Gennadi Goldberg,
the latest CPI report gives the Federal Reserve the green light to cut interest rates in September.
They stated, “Today’s CPI report is unequivocally good news for the Federal Reserve.”
With risks now evenly balanced or slightly tilted towards negative employment outcomes,
they expect the Fed’s next decision to entail the first rate cut.
Chris Zaccarelli from Independent Advisor Alliance believes the July CPI report essentially bears the message of “no new news is,
in itself, good news,” as markets were on edge. The Fed is looking to cut rates, but there is nothing in this report preventing them from doing so.
Seema Shah from Principal Asset Management said that the CPI numbers
remove any remaining inflation-related obstacles that might have prevented the Fed from starting a rate-cutting cycle in September.
However, the data also suggests limited urgency to cut by 50 basis points.
Florian Ilbo from Lombard Odier Investment Managers said the report offers little new information
to guide the Fed’s future decisions besides supporting the likelihood of a rate cut due to labor market concerns.
Anticipated Reports
Traders still expect a total monetary easing of just over one percentage point this year,
with three Federal Reserve policy meetings remaining this year.
In recent sessions, the market has been divided over
whether the September rate cut will be 25 or 50 basis points.
Brian Rose from UBS Global Wealth Management said,
“The inflation data was good enough to allow the Fed to begin cutting rates in September,
but it doesn’t give them a reason to cut aggressively.”
He added, “The decision on whether to cut by 50 basis points instead
of the usual 25 basis points could come down to the August jobs report.”
He also pointed out that Thursday’s upcoming retail sales figures represent another important data point,
with the primary downside risk to his base assumption of a soft landing being a decline in consumer spending.
Neil Sun, portfolio manager at BlueBay at RBC Global Asset Management,
commented, “The U.S. economy is slowing sustainably, and the labor market is showing some signs of slowing.
However, we are not overly concerned about short-term recession risks in the U.S.
We are prepared to cautiously take advantage of any dips resulting
from volatility if the underlying trends of easing inflation and sustainable economic slowdown in the U.S. continue.”
Wall Street Indices Rise Amid Rate Cut Expectations Following Inflation Report
Oil Prices Stabilize After Weekly Gains Amid Anticipation of Iran’s Response: Oil prices stabilized after achieving their first weekly gains since early July,
as the market awaits Iran’s response to the assassination of a Hamas leader in Tehran last month.
Asian Stocks Rise at the Start of a Data-Heavy Week
The regional stock index rose on Monday, following a 1.5% gain on Friday,
as indices in Australia, Taiwan, and South Korea climbed.
Stocks in Hong Kong fluctuated, while those on the mainland remained relatively unchanged.
The Japanese markets were closed today due to a holiday.
Oil Prices Stabilize After Weekly Gains Amid Anticipation of Iran’s Response
Oil prices stabilized after achieving their first weekly gains since early July,
as the market awaits Iran’s response to the assassination of a Hamas leader in Tehran last month.
Brent crude is trading below $80 per barrel after rising by about 4% last week,
while West Texas Intermediate crude neared $77.
Over the weekend, Tehran confirmed its intention to punish Israel for the killing of Hamas’ political leader,
with state media reporting that an Iranian army missile unit is conducting exercises near the Iraqi border.
The European Central Bank to Cut Interest Rates Six Times by the End of 2025
Economists expect the European Central Bank to cut the deposit rate
once every three months until the end of next year,
signaling an earlier end to the easing cycle than previously anticipated.
A Bloomberg survey showed that the benchmark interest rate will reach 2.25%
in December 2025 after six consecutive quarter-point cuts.
This compares to previous expectations that this level would only be reached in the second quarter of 2026.
Oil Prices Stabilize After Weekly Gains Amid Anticipation of Iran’s Response
The Intensifying Global Stock Decline After Weak U.S. Jobs Report: The global markets witnessed a wave of volatility and sharp declines after the release of the U.S. jobs report,
which was weaker than expected. This report raised concerns that the Federal Reserve might be too slow in reducing interest rates, causing panic and mass stock selling.
Many voices called for swift action to ease monetary policy amid speculations of a 50 basis point rate cut at the upcoming Federal Reserve meeting.
The yield on the two-year Treasury bond fell to its lowest level in 14 months,
while Japan’s Topix index had its worst session since 2016.
Decline in Technology Stocks
Amazon’sstock dropped by 8% due to concerns about weak demand for artificial intelligence,
while Intel’slosses exceeded 22%.
The global stock sell-off deepened with significant declines in bond yields,
reflecting investors’ fears that the Federal Reserve was too slow to cut interest rates.
Impact of the Report on U.S. Stocks
U.S. stocks fell in early trading hours after data showed a more-than-expected slowdown in U.S. employment in July.
The unemployment rate rose to its highest level in nearly three years, raising concerns that the labor market is slowing faster than other data suggests.
Major Tech Stocks Decline
The decline in significant tech stocks worsened asS&P 500 futures fell by 1.7%,
and Japan’s Topix index had its worst day since 2016.
The yield on the two-year Treasury bond fell to its lowest level in 14 months, increasing investors’ fears.
Speculations on Rate Cuts
Daniela Hathorn, a senior market analyst at Capital.com, said, “The data has started to show worrying signs,
which brings the consequences back to the Federal Reserve.” She added that investors fear the Fed might have waited too long to take action.
Movements in Technology Stocks
Amazon.com’s stock fell by 8.7% in pre-market trading due to concerns about rising costs to meet the demand for AI services. Intel’s stock dropped by more than 22% after providing bleak growth forecasts and planned to lay off 15,000 employees. Snap Inc.’s stock fell by 17% as revenue came in below estimates.
Expectations of Rate Cuts
Gary Dugan, CEO of Global CIO Office, said, “In the coming days,
there might even be a discussion about whether the Fed will need to cut rates by 50 basis points
at the next meeting to keep up with the economy’s loss of momentum.”
Increasing Global Tensions
Other factors that impacted the markets include rising tensions in the Middle East
after the assassination of the political bureau chief of Hamas in Tehran,
investors’ concerns about the slow Chinese economy and the fading previous hype about AI.
Markets Preparing for Fed Moves
Markets now anticipate that the Federal Reserve will make three consecutive quarter-point rate cuts in September,
November and December.
These developments have pushed the volatility index (VIX) to its highest closing level in nine months.
Investor Advice
Mark Haefele, Chief Investment Officer at UBS Global Wealth Management,
advised investors to prepare for renewed volatility but to avoid overreacting to short-term changes in market sentiment.
The Intensifying Global Stock Decline After Weak U.S. Jobs Report
The Impact of Federal Reserve Comments on U.S. Stock Indices: Federal Reserve Chairman Jerome Powell’s
comments have bolstered the recovery of U.S. stock indices,
This resulted in the market’s best trading day being synchronized with Federal Reserve announcements in two years.
Nvidia’sshares increased by 13% based on optimistic analyst calls. Meta’sshares rose after market closure due to sales exceeding expectations,
while Qualcomm’sshares provided strong revenue forecasts.
Impact of Federal Reserve Comments
Cautious comments from Federal Reserve Chairman Jerome Powell helped broaden the rise of U.S. stock indices.
Powell mentioned that the bank might lower interest rates “as soon as possible” in September,
following the Federal Open Market Committee’s decision to keep the federal funds rate unchanged from 5.25% to 5.5%.
Statement and Monetary Policy Adjustments
Policymakers made several adjustments to the statement’s language after their two-day meeting.
The statement shifted to saying the committee is “attentive to risks” to its dual mandate,
rather than the previous focus solely on inflation risks.
Market Performance After the Announcement
An exchange-traded fund worth $563 billion tracking the S&P 500 index rose by 1.6%.
The cross-asset rally on Wednesday was the largest of the year for sessions following monetary policy announcements.
The Bloomberg measure of the ‘Magnificent Seven’ added 3.5%, while the Russell 2000 index of small companies added 0.5%.
Reactions and Analyses
Neil Dutta from Renaissance Macro Research Described the press conference as more pessimistic than the statement,
adding that the committee is simply waiting,
and the data already points to the direction the Federal Reserve wants to see.
Peter Boockvar from The Boock Report: Powell wants to say today,
“Let’s do it,” but he knows he does not have to commit before getting more time and data.
Future Expectations
Interest rate swaps showed traders fully priced in a quarter-point rate cut in September and about 70 basis points this year.
David Russell from TradeStation Mentioned that the data has moved in Powell’s direction,
and he is now ready to follow through.
He added that Friday’s job data and the Consumer Price Index in two weeks are the following big points,
and he is expecting more explicit messages from Powell at Jackson Hole in late August.
The Impact of Federal Reserve Comments on U.S. Stock Indices
