From the studio

Video: Global CIO Mark Haefele on what could disrupt the recent “quiet” in markets (3 min)
Video: Three reasons why we like US financials (7 min)

Thought of the day

The Federal Reserve is widely expected to leave interest rates unchanged at the conclusion of its policy meeting today, marking the fifth consecutive meeting without a cut. Most top officials have reiterated that they need greater clarity on whether higher tariffs will lead to a one-off increase in prices, or a more sustained burst of inflation.

But despite the likely lack of action on interest rates, there will be plenty for investors to focus on today, from the tone of the Fed's statement and Chair Jerome Powell's press conference to the release of data on US growth.

Potential dissenting votes may add complexity to Fed’s independence. Fed Governors Christopher Waller and Michelle Bowman could potentially vote “no” on keeping the federal funds target range at 4.25-4.5%, as both have advocated for an early rate cut. While they would likely be comfortably outvoted, it has been more than five years since a rate decision faced more than one dissent. It would also be the first time since 1993 that two governors voted against a policy decision. It is normal to have disagreement among officials when policy is nearing a turning point. But recent pressure from the White House and the forthcoming shift in the composition of voting members on the Federal Open Market Committee have complicated the backdrop. Powell will likely have to defend the independence of Fed’s decision making firmly, after recent criticism from President Trump on the central bank's reluctance to ease policy so far this year.

The labor market is gradually losing momentum. Waller’s argument for a July rate cut is rooted in his concern that the US labor market is “on the edge” and could deteriorate rapidly if the Fed does not offer more support. Signs of a weakening labor market have consistently showed up in recent data—the latest Job Openings and Labor Turnover Survey (JOLTS) registered declines in both openings and hires, as well as a lower quits rate. This suggests that businesses are cautious in expanding headcounts while workers are less confident in finding another job. The Conference Board’s consumer confidence report also showed that households’ perception of current job availability has fallen to the weakest level in nearly 4.5 years. July’s nonfarm payrolls will be released later this week, but last month’s report has pointed to some moderation in private payrolls, the participation rate, and average hourly earnings.

US growth should slow further as tariffs start to hit the economy. Markets will also be watching the advance GDP estimate released by the Commerce Department today. Growth in the second quarter likely rebounded from the 0.5% contraction in the first three months of the year amid a smaller trade deficit and a moderate increase in consumer spending, with consensus pointing to a 2.4% expansion quarter over quarter. However, with the headline number likely heavily distorted by trade, as was the case in the first quarter, details of the report would be critical in assessing the health of the US economy. We expect US growth to slow to around 1.5% this year as the direct and indirect effects of trade tariffs continue to feed through to the economy.

So, we continue to expect Fed to resume policy easing in September, cutting rates by 100 basis points over the next 12 months. Investors should consider medium-duration high grade and investment grade bonds for more durable portfolio income.