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Week started on a bullish note in Europe and the US as Jow Biden’s decision to leave the presidential race didn’t impact the market mood. The S&P500 rebounded 1% following its worst week since April on a Big Tech selloff and on rising worries that a second term for Donald Trump in the White House would worsen the global trade relations. Nasdaq 100 gained more than 1.50% as Magnificent 7 climbed 2.5% led by a nearly 5% jump in Nvidia and a more than 5% jump in Tesla.

Tesla and Google are due to report earnings today after the bell, and their results – or the reaction to their results – could shift the wind in either direction. Despite almost doubling its stock price between April and July, Tesla sees appetite for its cars and its market share under pressure, and the company’s operating profit is expected to shrink in the Q2 for the 6th straight quarter. What keeps optimism alive for Tesla is the robotaxi plan. But robotaxis will cost to the company before it can generate profit. Therefore, the recent gains may not find a solid ground to let the share price extend gains. The key support to the robotaxi-led rally stands at $220 per share, the major 38.2% Fibonacci retracement on April to July rebound. For Google, investors will be closely watching the cloud revenue and whether the AI spending is making a difference for the ad revenue. For this quarter, analysts are expecting impressive numbers: Google’s earnings per share is expected to have risen from $1.44 to $1.85 and its revenue from $74.6 to $84.35 billion. This would mark a significant increase from the same period last year and give hope that the AI trade is not yet exhausted. The risk is, given the sky-high Big Tech valuations, any delay in AI revenue, any unpleasant detail, or any misstep could have a sector-wide negative impact and lead to a rapid selloff in AI-related stocks.

In Europe, the Stoxx 600 gained more than 1% on Monday. The earnings season started on a relatively positive note with around 30% companies beating profit expectations, but luxury and airlines don’t look in a great shape. Ryanair shares plunged 15% after the company cut its summer fare forecast because of ‘materially lower’ ticket prices on growing reluctance from consumers to carry on the weight of higher prices. That’s bad news for company profits but it’s clearly good news for inflation expectations. It means that the companies are visibly losing their pricing power, and should stop hiking prices if they want to sell their goods and services to people who continue to struggle with ongoing cost-of-living crisis. In the same context, Mc Donald’s is also looking to extend its $5 value meal in most Us markets as they think that the deal boosts traffic in its stores. All encouraging news for your central bankers.

FX, bonds and energy

The US 2-year yield consolidates near the 4.50% level, the 10-year yield is sitting close to 4.20% and the US dollar index remains offered near its 200-DMA. But the USD weakness is countered by higher expectations of rate cuts from other major central banks. The euro bulls for example remains timid into the $1.10 mark, while Cable is back below the 1.30 level on uncertainties regarding the Bank of England’s (BoE) next move. In Japan, the yen gains some strength on FX interventions and on some hawkish expectations building into next week’s Bank of Japan (BoJ) meeting that could bring a rate hike, according to some. We hear growing pressure from the political figures as well. A senior official from the ruling party has urged the BoJ to clearly communicate its plan to normalize monetary policy through steady interest rate hikes, noting that the excessive decline of the yen is harming the economy. Prime Minister Kishida also emphasized that normalizing the central bank’s monetary policy would support Japan's transition to a growth-driven economy. As such, the yen is coming to a crossroads near 155 against the US dollar. Either a concrete BoJ action will back a further rise in the yen and back a further decline in the USDJPY toward the 150 level, or the pair will remain within an infernal cycle and go back to the 160 level on unresponsive BoJ. Elsewhere, the BoC is expected to trim its rate by 25bp when officials meet tomorrow.

In energy, US crude slipped below the $80pb psychological and Fibonacci support and tipped a toe below the 200-DMA despite a surprise People’s Bank of China (PBoC) rate cut, the reflation-positive market environment and supply concerns on rising geopolitical tensions in the Mid-East and Canadian wildfires. The expectation that OPEC will starts unwinding its production restrictions in Q4 and the rising odds that Trump presidency would further boost the US production take the upper hand. From a technical standpoint, oil has now stepped into the medium-term bearish consolidation zone and could experience deeper declines. Next support is seen at $78.60/80 region and should be strong given that the rising expectations of rate cuts from the major central banks is still positive for oil prices, while offers now look crowded into the $80pb level.

Daily Pivots: (S1) 202.15; (P) 202.88; (R1) 203.86; More...

Intraday bias in GBP/JPY remains on the downside for the moment. Fall from 208.09, as a correction to whole rise from 178.32, is in progress. Sustained break of 55 D EMA (now at 201.13) will target 38.2% retracement of 178.32 to 208.09 at 196.71. Nevertheless, break of 204.20 resistance will retain near term bullishness and bring retest of 208.09 high.

In the bigger picture, medium term outlook will stay bullish as long as 188.63 resistance turned support holds. Long term up trend remains in favor to continue through 208.09 at a later stage. However, firm break of 188.63 will be a strong sign of bearish trend reversal.

Yen is trading broadly higher in otherwise sluggish Asian session today. The central focus remains on whether BoJ will implement another interest rate hike at its upcoming announcement on July 31. Media reports suggest that some BoJ officials are concerned about weak consumer spending, which complicates their decision-making. The possibility of postponing the rate decision until the July meeting to gather more data is being considered by some officials, as they look to see if this year's strong wage growth will indeed boost consumer spending. Either way, this month's decision is expected to be down to the wire, with key economic indicators such as this week's Tokyo CPI and next Wednesday's retail sales data playing crucial roles in the final determination.

In other market developments, the selloff in commodity currencies continues, with Australian Dollar and New Zealand Dollar facing significant pressure. Canadian Dollar, however, is faring slightly better. Following Yen's lead, Swiss Franc and Dollar are also showing strength, while he Euro and Sterling positioned in the middle of the pack. It's noted that European majors and Dollar are trading within a narrow range against each other, suggesting that their positions could shift easily depending on upcoming market dynamics. However, the stalled recovery in both EUR/USD and GBP/USD suggests that Dollar may be gearing up for another potential rebound, especially if global risk sentiment deteriorates.

Technically, NZD/USD's fall from 0.6621 extends further and takes out 61.8% retracement of 0.5851 to 0.6221 at 0.5992 with conviction. Also, the break of near term falling channel support indicates downside acceleration. Decline from 0.6221 is likely resuming whole fall from 0.6368. Near term outlook will stay bearish as long as 0.6047 support turned resistance holds. Deeper fall should be seen through 0.5851 support, and possibly through 0.5771 too, to 100% projection of 0.6368 to 0.5851 from 0.6221 at 0.5694.

In Asia, at the time of writing, Nikkei is up 0.05%. Hong Kong HSI is down -0.16%. China Shanghai SSE is down -0.62%. Singapore Strait Times is up 0.54%. Japan 10-year JGB yield is up 0.0028 at 1.068. Overnight, DOW rose 0.32%. S&P 500 rose 1.08%. NASDAQ rose 1.58%. 10-year yield rose 0.021 to 4.260.

AUD/CAD struggles as impact of interest rate policies sidestepped

Australian Dollar continues to face significant headwinds, largely due to ongoing worries about the Chinese economy—the most significant trading partner. Despite the possibility of RBA raising interest rates while other global central banks are adopting easing policies, this potential policy divergence is currently providing little support for the Aussie. Market focus has shifted away from these interest rate considerations, at last for the time being.

Recent developments, including China's Third Plenum last week, have left investors disappointed due to the lack of substantial measures announced to revitalize the slowing Chinese economy, currently grappling with deflation risks and a troubled housing market. The People's Bank of China's unexpected rate cut yesterday, although aimed at addressing these issues, was perceived as too modest to make a significant impact.

Adding to the complexity is the uncertainty surrounding the upcoming US presidential election. Overnight reactions in the US stock market to Joe Biden's withdrawal from the presidential race—and Kamala Harris stepping in as the Democratic candidate—were initially positive. However, the realistic possibility of Donald Trump securing a victory poses concerns, particularly regarding his trade tariff policies, which could exacerbate the economic slowdown in China

AUD/CAD's decline starkly illustrates that interest rate policies are not the primary driver for the Aussie at this time. With BoC's anticipated rate cut this week and uncertainty over whether RBA might hike rates again, the currency pair should theoretically have more room to rally. But the cross has indeed turned south.

Technically, considering bearish divergence condition in D MACD, a medium term top could have been formed at 0.9262, just ahead of 100% projection of 0.8562 to 0.9063 from 0.8779 at 0.9280. Near term focus is on 55 D EMA (now at 0.9108). Decisive break there would at least send AUD/CAD to 38.2% retracement of 0.8562 to 0.9262 at 0.8995, with risk of further fall to channel support (now at 0.8872).

Looking ahead

The economic calendar remains near empty today. US existing home sales and Eurozone consumer confidence are the only features.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 202.15; (P) 202.88; (R1) 203.86; More...

Intraday bias in GBP/JPY remains on the downside for the moment. Fall from 208.09, as a correction to whole rise from 178.32, is in progress. Sustained break of 55 D EMA (now at 201.13) will target 38.2% retracement of 178.32 to 208.09 at 196.71. Nevertheless, break of 204.20 resistance will retain near term bullishness and bring retest of 208.09 high.

In the bigger picture, medium term outlook will stay bullish as long as 188.63 resistance turned support holds. Long term up trend remains in favor to continue through 208.09 at a later stage. However, firm break of 188.63 will be a strong sign of bearish trend reversal.

Economic Indicators Update

Australian Dollar continues to face significant headwinds, largely due to ongoing worries about the Chinese economy—the most significant trading partner. Despite the possibility of RBA raising interest rates while other global central banks are adopting easing policies, this potential policy divergence is currently providing little support for the Aussie. Market focus has shifted away from these interest rate considerations, at last for the time being.

Recent developments, including China's Third Plenum last week, have left investors disappointed due to the lack of substantial measures announced to revitalize the slowing Chinese economy, currently grappling with deflation risks and a troubled housing market. The People's Bank of China's unexpected rate cut yesterday, although aimed at addressing these issues, was perceived as too modest to make a significant impact.

Adding to the complexity is the uncertainty surrounding the upcoming US presidential election. Overnight reactions in the US stock market to Joe Biden's withdrawal from the presidential race—and Kamala Harris stepping in as the Democratic candidate—were initially positive. However, the realistic possibility of Donald Trump securing a victory poses concerns, particularly regarding his trade tariff policies, which could exacerbate the economic slowdown in China

AUD/CAD's decline starkly illustrates that interest rate policies are not the primary driver for the Aussie at this time. With BoC's anticipated rate cut this week and uncertainty over whether RBA might hike rates again, the currency pair should theoretically have more room to rally. But the cross has indeed turned south.

Technically, considering bearish divergence condition in D MACD, a medium term top could have been formed at 0.9262, just ahead of 100% projection of 0.8562 to 0.9063 from 0.8779 at 0.9280. Near term focus is on 55 D EMA (now at 0.9108). Decisive break there would at least send AUD/CAD to 38.2% retracement of 0.8562 to 0.9262 at 0.8995, with risk of further fall to channel support (now at 0.8872).

Short Term Elliott Wave View in Copper (HG) suggests that correction from 5.20.2024 high remains in progress. The internal subdivision of the correction is unfolding as a double three Elliott Wave structure. Down from 5.20.2024 high, wave (W) ended at 4.305 and rally in wave (X) ended at 4.7015. Wave (Y) lower is in progress as a zigzag structure. Down from wave (X), wave ((i)) ended at 4.551 and rally in wave ((ii)) ended at 4.657. The metal then extends lower again in wave ((iii)).

Down from wave ((ii)), wave (i) ended at 4.476 and rally in wave (ii) ended at 4.6025. The metal turns lower again in wave (iii) ended at 4.2 and wave (iv) rally ended at 4.242. Wave (v) lower ended at 4.162 which completed wave ((iii)) in higher degree. Rally in wave ((iv)) is currently in progress to correct cycle from 7.10.2024 high in 3, 7, or 11 swing before it resumes lower again. Near term, as far as pivot at 4.701 high stays intact, expect rally to fail in 3, 7, or 11 swing for further downside. Potential target lower is 100% – 161.8% Fibonacci extension from 5.20.2024 high. This area comes at 3.6 – 3.81 where support can be seen.

Copper (HG) 60 Minutes Elliott Wave Chart

HG_F Elliott Wave Video

https://www.youtube.com/watch?v=Bth5NrVDFSk

Key Highlights

• GBP/USD started a downside correction from the 1.3050 zone.
• It traded below a connecting bullish trend line with support at 1.2970 on the 4-hour chart.
• Gold prices corrected gains and traded below $2,425.
• Oil prices extended losses and declined below the $80.00 level.

GBP/USD Technical Analysis

The British Pound remained in a positive zone above the 1.2850 level against the US Dollar. GBP/USD climbed above the 1.3000 resistance before the bears appeared.

Looking at the 4-hour chart, the pair tested the 1.3050 level, and settled above the 100 simple moving average (red, 4-hour) and the 200 simple moving average (green, 4-hour). Recently, the pair started a downside correction below the 1.3000 level.

It traded below a connecting bullish trend line with support at 1.2970 on the same chart. The bears pushed the pair below the 23.6% Fib retracement level of the upward move from the 1.2615 swing low to the 1.3044 high.

However, the bulls are active near 1.2900. If there is a fresh increase, the pair could face resistance near the 1.2940 level. The next resistance sits at 1.2965. The main hurdle sits at 1.3000.

A clear move above the 1.3000 resistance might send it toward the 1.3050 level. Any more gains might open the doors for a test of the 1.3150 zone in the coming days.

Immediate support is near the 1.2890 level. The next major support is near the 1.2830 level and the 50% Fib retracement level of the upward move from the 1.2615 swing low to the 1.3044 high. A downside break and close below the 1.2830 support zone could open the doors for more losses. In the stated case, EUR/USD might decline toward the 1.2750 level.

Looking at Gold, there was a fresh bearish reaction, and the bears were able to push the price below the $2,425 level.

Economic Releases

• Euro Zone Manufacturing PMI for July 2024 (Preliminary) – Forecast 46.1, versus 45.8 previous.
• Euro Zone Services PMI for July 2024 (Preliminary) – Forecast 53.0, versus 52.8 previous.
• UK Manufacturing PMI for July 2024 (Preliminary) – Forecast 51.1, versus 50.9 previous.
• UK Services PMI for July 2024 (Preliminary) – Forecast 52.5, versus 52.1 previous.
• US Manufacturing PMI for July 2024 (Preliminary) – Forecast 51.7, versus 51.6 previous.
• US Services PMI for July 2024 (Preliminary) – Forecast 54.4, versus 55.3 previous.

• Fed to get final clues on growth and inflation before July meeting
• But with traders more preoccupied with politics, will the data move the dollar?
• Preliminary GDP is due Thursday and PCE inflation on Friday, both at 12:30 GMT

Fed still wants to see more progress

The recent inflation reports have brought some much needed relief for both policymakers and the markets, pointing to a resumption of the downward trend after several months of sideways movement. The Fed has even toned down its hawkish rhetoric somewhat, hinting that a rate cut may be nearing.

However, Chair Jerome Powell was also quite specific when he addressed lawmakers earlier this month that the Fed wants to see more good data to gain greater confidence of achieving its 2% price objective. Hence, Friday’s PCE inflation figures could be crucial in taking the Fed a step closer towards its target.

The personal consumption expenditures (PCE) price index is expected to have eased from 2.6% in May y/y to 2.4% to June, which would make it the lowest since February 2021. The more important core PCE price index that strips out food and energy prices is forecast to have edged down 0.1 percentage points to 2.5% y/y in June – also a more than three-year low.

Are American households spending less?

Included in the same report are the personal income and personal consumption numbers. The former is expected to have risen by 0.4% m/m in June, slowing from 0.5%, and the latter by 0.3% m/m, in a modest pick up from 0.2%.

Recent indicators suggest the US consumer is finally reining in spending and this may have contributed to the Fed’s slight dovish lean, as weaker consumption would reduce the upside risks to inflation. But if there’s an unexpected acceleration, the Fed will be more inclined to maintain a cautious stance when it meets next week.

GDP growth probably quickened in Q2

Overall, though, it’s clear that the US economy has lost steam this year, with even the red-hot labour market cooling a bit lately. Yet, there have been some discrepancies between the different data sets and it’s not just inflation that policymakers have struggled to get a clear read on. Although it can only be a good thing that a soft landing seems achievable and is not simply an elusive goal, the Fed would probably prefer for growth to have slowed more sharply by now to aid its fight against inflation.

Thursday’s advance estimate of GDP growth for the second quarter is not expected to do much in clearing the fog. The US economy is projected to have expanded by an annualized rate of 2.0% in Q2 versus 1.4% in the prior three months.

Fed not in a rush to cut

A lower print would ease concerns about domestic demand remaining too strong, but the bigger question is would softer readings on either inflation or growth, or both, prompt some kind of a policy shift by the Fed at the July 30-31 meeting?

Judging by their language, policymakers seem quite comfortable to wait a while longer so unless there is anything in the incoming data that points to a sudden deterioration in the economy, the Fed will probably make only slight tweaks to its language to flag a possible rate cut in September without quite committing to it.

Dollar on the backfoot

The US dollar could come under pressure if this week’s releases bring a September cut closer. Against currencies such as the Japanese yen, the greenback has already suffered substantial losses over the past couple of weeks and a further selloff could bring the 155.00 support into view.

However, any setback from the data to rate cut bets, particularly from a hotter-than-expected core PCE number, could spur a rebound in the dollar, pushing it above its 50-day moving average (MA), which has started to flatten at 158.00 yen.

US elections keeping markets on edge

In the meantime, investors will also be keeping a close watch on the US presidential race as the Democrats’ chances of securing another victory got a boost following President Biden’s decision on Sunday not to stand for re-election and to instead endorse his vice president, Kamala Harris, as the party’s nominee.

There’s still some way to go before the Democrats formally pick their candidate at the party’s convention next month but should the opinion polls suggest that Harris poses a threat to Trump’s bid to re-enter the White House, the dollar could slip a little as there would be less of a risk of higher trade tariffs from a Trump presidency, which have the potential to push up inflation.

• S&P 500 continues daily uptrend
• Likely to rise to resistance level 5675.00

S&P 500 Index recently reversed from the support area between the key support level 5500.00 (former resistance from June) and the 38.2% Fibonacci correction of the previous upward impulse from May.

The upward reversal from this support area will likely form the daily Japanese candlesticks reversal pattern Bullish Engulfing if the price closes today near the current levels – a strong buy signal for this index.

Given the clear daily uptrend, S&P 500 Index can be expected to rise further to the next resistance level 5675.00 (top of the previous wave i).

Summary

• Congress has given the Federal Reserve a dual mandate of "maximum employment" and "price stability." With inflation surging to a 40-year high in 2022, the FOMC largely has focused on its "price stability" mandate in recent years.
• However, inflation is showing signs of moving back toward the FOMC's target of 2% on a sustained basis, and the labor market has softened somewhat recently. In short, the implicit weighting of the two objectives in the FOMC's reaction function seem to be moving back into balance.
• We do not believe a consensus exists among FOMC members to cut rates at the upcoming meeting. But, we think the Committee will signal via its post-meeting statement that a rate cut could come as soon as its next meeting on September 18. Specifically, the FOMC likely will indicate it has seen more material improvement on inflation in recent months. We also expect the statement to acknowledge the Committee is now attentive to labor market risks as well, rather than focusing solely on inflation risks.
• The real fed funds rate has crept higher in recent months as inflation has receded. This passive tightening of monetary policy is another reason for the FOMC to consider policy easing in the not-too-distant future.
• In our view, the presidential election on November 5 will not preclude a rate cut on September 18, if conditions warrant. The historical record shows that political considerations do not seem to enter the FOMC's calculus.

The Objectives of the Fed's Dual Mandate Are Moving into Balance

Congress has given the Federal Reserve a dual mandate: “maximum employment” and “stable prices.” The former is more of a theoretical concept than a precise target, but Fed officials have chosen to define the latter as a 2% annual change in the price index for personal consumption expenditures (PCE). Prior to the pandemic, when PCE inflation was consistently running at, or below, 2%, the Federal Open Market Committee (FOMC) seemed to have placed equal weight on these two objectives when setting the stance of monetary policy. However, the surge in the year-over-year rate of PCE inflation to a 40-year high of roughly 7% in 2022 led the FOMC to focus almost entirely on the price stability part of its dual mandate (Figure 1). Consequently, the FOMC jacked up its target range for the federal funds rate by 525 bps between March 2022 and July 2023, the fastest pace of monetary tightening since the early 1980s.

However, the implicit weighting of the two objectives in the FOMC's reaction function seem to be moving back into balance due to recent economic developments. For starters, inflationary momentum is slowing. The PCE price index rose at an annualized rate of 2.4% between February and May, down sharply from the 3.8% annualized rate that was registered in April (Figure 1). If our forecast of a 0.1% monthly increase in the PCE price index in June is accurate—the data are scheduled for release on July 26—then that three-month annualized rate of change will slow to only 1.3%. Inflation also appears to be back near the Fed's target when looking at the less volatile core PCE index, which we estimate rose at a 2.0% annualized rate in the three months through June. Over the 12-month period ending in June, we expect both headline and core PCE inflation to have risen 2.5% and 2.6%, respectively. Although still above the FOMC's 2% target, inflation has returned to a pace much more in line with recent history.

On the other side of the mandate, a number of indicators suggest that the labor market is softening. Growth in nonfarm payrolls slowed from an average monthly increase of 267K in the first quarter to 177K in the second quarter. The unemployment rate, which was as low as 3.4% in April 2023, has moved up to 4.1% (Figure 2). Continuing claims for unemployment insurance have risen to their highest level since November 2021, indicating it is taking longer for unemployed workers to find new jobs. The job openings rate, which measures total job openings as a percent of payrolls plus openings, has receded considerably over the past two years and currently stands near its level of late 2019.

Signal From Post-Meeting Statement: Rate Cuts Are Coming

With inflation having more clearly resumed its trek back to 2% and the jobs market no longer overheated, a reduction in the fed funds rate is coming closer into view. We expect the FOMC will hold its policy rate at its current range of 5.25%-5.50% at the conclusion of its upcoming meeting on July 31. But we expect the Committee will signal a rate cut could come as soon as its next meeting on September 18. While an updated Summary of Economic Projections (SEP) will not be released at this meeting, we expect the Committee will send a rate cut signal via changes to the post-meeting statement.

Specifically, the FOMC likely will indicate it has seen more material improvement on inflation in recent months than the “modest” further progress it noted in the statement from the June meeting. For example, it could say that there has been “additional” further progress, and this would be consistent with the Committee accumulating some “greater confidence” of inflation returning toward 2% on a sustained basis. In that regard, San Francisco Fed President Mary Daly, a voting member of the FOMC this year, recently stated “confidence is growing that we're getting nearer a sustainable pace of getting inflation back down to 2%,” although she went on to note “we have a lot more information to get before we can make any real determination.”

We also expect to see the statement elevate downside risks to the labor market. The Committee may note that its employment and inflation goals are now balanced, rather than merely having “moved toward better balance.” The post-meeting statement has indicated for some time that “the Committee remains highly attentive to inflation risks.” We see a strong possibility the statement will add a clause indicating the Committee is attentive to labor market risks as well. That message was delivered by Chair Powell in his testimony to Congress earlier this month, and one that has been echoed by other FOMC participants over the inter-meeting period, including Governors Waller and Kugler, and regional Fed Presidents Daly and Barkin (Richmond–voter). In the same vein, a modest downgrade to the characterization of recent economic activity and labor conditions would not surprise us.

There has been a passive tightening of monetary policy in recent months, which is another reason to cut rates soon. That is, the stance of policy is measured by the real fed funds rate, not by nominal interest rates. We measure the real fed funds rate by subtracting the year-over-year change in the core PCE price index from the nominal fed funds rate (Figure 3). By that metric, the real fed funds rate currently stands near 3%, the highest level since 2007. Most observers, members of the FOMC included, believe the stance of monetary policy today is "restrictive." Austan Goolsbee, the president of the Federal Reserve Bank of Chicago and a voter at the July 31 FOMC meeting, suggested in recent comments that the need for policy easing is becoming more appropriate. Goolsbee noted that "we set this rate when inflation was over 4%, and inflation is now, let's call it, 2.5%. This implies we have tightened a lot since we've been holding at this rate." Holding the nominal fed funds rate steady while inflation has receded has led to a rise in the real fed funds rate; that is, there has been a passive tightening of monetary policy.

Although we believe it is highly likely the FOMC will remain on hold on July 31, the probability of a rate cut, albeit low, is not zero either. Some of the more “dovish” members of the Committee (e.g., voting members Governors Cook and Kugler, Presidents Daly and Goolsbee, and non-voting member President Harker (Philadelphia)) may argue during the meeting that the FOMC needs to “get ahead of the curve” by cutting rates in July or else risk a significant deterioration in labor market conditions in coming months. That said, we doubt a consensus exists on the Committee at this time to ease policy on July 31. The Committee could head off a potential dissent or two by some of these more dovish voting members by signaling in the post-meeting statement that policy easing is coming into view.

The “blackout period,” during which FOMC members refrain from making public comments, is now underway. So if policy easing at the upcoming FOMC meeting on July 31 really is under active consideration at this time, then policymakers would need to signal in coming days that a rate cut could happen at that meeting. Otherwise, market participants could be surprised, a development the FOMC generally wants to avoid because it believes policy is more effective when the public clearly understands the Fed's intentions. Market participants could be given “heads up” that policy easing will be under active consideration on July 31 via a leak in coming days to a major media organization that is attributed to a “senior Fed official.” We doubt this is likely, but highlight it as a risk given that we believe an important inflection point in monetary policy is drawing near.

Will the November 5 Presidential Election Preclude a Rate Cut on September 18?

If, as we expect, the post-meeting statement on July 31 suggests that the time for policy easing is approaching, attention will naturally shift to the next policy meeting on September 18. Indeed, the rates market is essentially fully priced as of this writing for a 25 bps rate cut at that FOMC meeting. But will the FOMC change policy with the November 5 presidential election looming in the near future?

Chair Powell has repeatedly stressed that the FOMC will not allow political considerations to affect the Committee's decisions regarding monetary policy. For example, Powell said on May 1 that FOMC members were "at peace" with keeping political considerations out of their deliberations. He went on to say “if you go down the road, where do you stop? And so we're not on that road. We're on the road where we're serving all the American people, and making our decisions based on the data and how those data affect the outlook and the balance of risks.” Furthermore, the historical record supports Powell's contention. The word-by-word transcripts of the FOMC meetings that have preceded previous presidential elections show that political consideration generally are not discussed. If, as we forecast, inflationary pressures continue to ease and the labor market softens further, then we believe the FOMC will reduce its target range for the federal funds rate by 25 bps at the September 18 meeting and by another 25 bps on December 18. For further reading on the historical record for FOMC policy decisions in election years, see the special report we published earlier this year, which can be found here.