Fed bets slip, Powell takes the stage

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

U.S. stocks fell on Thursday and the dollar and Treasury yields rose, as solid factory data cast a bit more doubt on the Fed's readiness to lower interest rates next month. All eyes are now firmly on Fed Chair Jerome Powell's Jackson Hole speech on Friday.

More on that below. In my column today, I look at the apparent contradiction between record inflows into U.S. assets from abroad, and the 125 basis points of interest rate cuts traders are expecting by the end of next year. It doesn't add up.

I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Jackson Hole. Fed Chair Jerome Powell's eighth and final Jackson Hole speech is almost upon us. There may be three broad elements of his address to focus on: near-term policy signals, a new framework for the central bank, and a defense of his tenure. 

All three will be dissected, debated and debunked. The most important element for investors in the near term will be whether he leans toward a rate cut next month. These will be his first public remarks since weak jobs data three weeks ago made a September rate cut a virtual certainty, according to U.S. rate futures. 

Traders are no longer quite so certain, and rates futures markets are now barely attaching a one-in-four probability of a cut, the lowest since that payrolls shock three weeks ago. 

* Economic resilience. There were mixed signals in Thursday's sprinkling of U.S. employment, industry and activity indicators, but perhaps the most significant was the surprise strength in the manufacturing purchasing managers index. 

The flash manufacturing PMI for July was 53.3. If confirmed by the final figure, this will be the highest in three years. Three Fed officials on Thursday signaled they are not ready to cut rates right now, and more figures like this PMI report will make the dovish case even harder to argue. 

The PMI surprises were not confined to the US - the latest reports from Australia, Japan, India, the euro zone and Britain show that global business activity this month was strong too.

* Trade. After a quiet few days for the global trade wars, investors got a reminder on Thursday of the brave new world ahead, as the US and European Union locked in a framework deal reached last month that includes a 15% U.S. tariff on most EU imports.

In a 3-1/2-page joint statement, the two sides listed the commitments made, and senior EU officials said they are still pressing for lower duties on wine and spirits exports. One of the most controversial elements of the deal is European companies' apparent commitment to invest $600 billion in the US through 2028. Watch this space.     

Is the U.S. economic outlook so weak that it warrants multiple interest rate cuts? Or are U.S. markets pulling in huge inflows from abroad because the country's outlook is so attractive?

Both can't be right, yet those are the respective narratives indicated by current pricing in the rates market and the latest capital flows data. Something doesn't quite add up.

Much has been written this year about how foreign investors – spooked by U.S. President Donald Trump's unorthodox, populist policies – were going to reduce their exposure to U.S. markets and deploy that capital elsewhere.

But that's not how it is panning out.

Treasury International Capital (TIC) figures last week showed that foreign investors bought a net $192 billion of U.S. securities in June. This followed a record net purchase of $326 billion in May, swelled by the largest ever inflow from the private sector. 

Once U.S. investors' purchases of foreign assets are discounted, the net flow of long-term capital into U.S. securities in June was still a healthy $151 billion, taking the total for the second quarter to a record-matching $410 billion. 

Zooming out a little further, net inflows in the first half of this year stood at $643 billion, on course to match the record $1.3 trillion net inflow from 2022. And in the 12 months through June, a net $1.27 trillion was poured into U.S. stocks, Treasuries, agency and corporate debt. 

The end of American exceptionalism? It sure doesn't look like it.

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