Markets Risk-Off Leading Into FOMC

Treasuries rally on jobs data, trade news. JOLTS job openings decreased to 7437k, the first decline in three months and a signal that labor market strength may be deteriorating. Yields fell in response, as a weaker labor market could force the Fed to cut rates earlier and/or more aggressively than expected. Trade deal progress with China also contributed to the Treasury rally as expectations for tariff-driven inflation continue to dwindle. The 2-year yield closed 6 bps lower at 3.87% while the 10-year closed 9 bps lower at 4.32%. Meanwhile, equities fell in the risk-off session, with the S&P 500, NASDAQ, and DJI down 0.30%-0.46%.

FOMC policy decision at 2 pm tomorrow. The Fed is widely expected to hold policy rates steady at 4.25-4.50% tomorrow for the fifth straight meeting. However, many traders are expecting Fed Chair Powell to adopt a dovish tone at the post-FOMC press conference to appease the outspoken dovish voters. Governor Christopher Waller is expected to dissent, given his recent comments supporting a 25 bp cut tomorrow, and Governor Michelle Bowman is likely to join him. That would be the first time two officials have dissented in a meeting since 1993. Fed Funds futures have a 25 bp rate cut priced in as ~70% likely by September, the first of two likely moves this calendar year.

The U.S. and China to continue trade negotiations. Ahead of the upcoming August 12th tariff deadline, Treasury Secretary Scott Bessent told media that an additional 90 day truce with China is viable, while Chinese trade negotiator Li Chenggang stated that both sides have agreed to extend the truce, but didn’t specify for how long. According to U.S. trade representative Jamieson Greer, Beijing has conceded to reinstating rare earth exports, a main point of discussion. It is believed that the U.S. will loosen controls on microchip exports in response. Despite the progress, some staunch anti-Chinese voices in Washington worry the White House is making too many concessions in hopes of landing a summit with President Xi. President Trump has pushed back on those accusations on Truth Social, saying he would only meet with his Chinese counterpart if formally invited.