Earnings, Fed, Data

MACRO FRAME

With another hold on policy, markets look to domestic data in the US, while the geopolitical factors continue to support a hawkish macro backdrop.

STOCK INDEX FUTURES

Equity index futures moved higher overnight. Meta’s and Microsoft’s Q2 earnings told underscored the two different reaction functions of investor appetite to the tech space. Meta’s Q2 numbers underlined the growing tension between AI ambition and investor patience, while Microsoft’s latest quarter showed that that it is turning AI spend into visible returns. Meta’s free cash flow slumped about 90% as AI capex surged and the company raised the low end of its spending range to $130–145bn. While Microsoft reported an increase in capex and drop in free cash flow, those numbers were countered with visible returns in some of its AI business units, shaping the view that the spending was feeding margins rather than weighing on them. The reports also would suppose that demand for chips and other AI infrastructure remain firmly in place. As for the broader tech space and consequently the Nasdaq, sentiment over AI infrastructure and spend continues to play a dominate role in price direction.

Wednesday’s Fed hold was interpreted as dovish by markets, as Warsh talked about a “period of watchful thinking” and gave little sense of urgency to hike, while only three policymakers voted for a hike in policy. Still, the voting result represents one of the most divided in recent memory.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index was lower overnight, but found some strength following this morning’s data. It is down 0.2% at 100.68. The dollar lost strength following a dovish read of the Fed’s decision to hold and Warsh’s ‘period of watchful thinking’ comments, though the safe‑haven bid picked up on fresh US air strikes in Iran. With traders paring back expectations of fed-tightening, the dollar is losing some support in interest-rate differentials, which have been a dominant driver of dollar direction in recent months. Still, the sustained move above the 100 level in DXY since mid-June continues to reflect market expectations that the Fed will hike rates this year. That dynamic will leave DXY vulnerable to the divergence in policy expectations between Fed and ECB.

EURO: The euro is higher at $1.1475. The euro broke out of its recent range following yesterday’s Fed hold, while this morning’s data out of the bloc has underpinned the move. Stronger-than-expected economic data from the eurozone has reinforced market expectations that the European Central Bank will raise rates again hike this year. GDP in the eurozone grew by 0.4% in Q2, above forecasts of 0.2%, marking the strongest growth since early 2025. Elsewhere, firmer inflation readings in Germany and Spain have also supported expectations that policy will move upwards in the coming months. Money markets are pricing a near 65% chance of a hike in September and remain fully priced in for a move higher in October, which is largely unchanged from yesterday. With no improvement in tanker flows through the Strait, in the event of a deal, the market will likely continue to price in risk premium, keeping European bond yields and policy tightening expectations elevated. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction.

Watch point: With the pause in fighting supportive in the near-term, broader price direction will be subject to Fed-ECB policy expectations.

BRITISH POUND: Sterling is higher at $1.3375. The Bank of England held rates steady as expected in a 6-3 vote, which was a more hawkish outcome than market expectations of a 7-2 vote. Catherine Mann, Megan Greene, and Chief Economist Huw Pill, among the more hawkish on the board, voted for a rise in the Bank Rate to 4%. Governor Bailey noted that holding the Bank Rate steady was appropriate given uncertain global conditions, while domestic conditions have turned more benign. Largely, the BoE is not seeing enough to abandon its wait-and-see approach. Money markets have pushed back the timing of a fully priced rate-hike to December in response to the hold.

JAPANESE YEN: The yen is 0.30% higher at 162.93 yen per dollar. The yen briefly spiked against the dollar earlier in the morning though the move did seem to reflect official intervention from the government. The Bank of Japan meets overnight; markets are focused on how strong or weak forward guidance from the bank is. Policymakers will likely stay ambiguous about further moves, though a lack of a commitment to raising rates is expected to leave a bearish pressure on the currency. While the policy rate is expected to stay at 1%, some recent reporting suggests officials are at least considering a faster hiking pace as inflation pressures from the Gulf conflict and a weak yen build. Verbal efforts to support the yen have had little effect on the currency, and official intervention is unlikely to offer a durable rebound unless the BoJ commits to raising rates quickly. Therefore, BoJ rate hike expectations will continue to be the dominant driver in yen direction, outside of the geopolitical bid.

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.30% higher at $0.6976. Second-quarter inflation in Australia came in below forecasts, with the key trimmed mean measure of core inflation up 0.8% QoQ, below forecasts for 0.9%. The annual pace landed at 3.6% YoY, up from 3.5%, but below the RBA’s forecast of 3.8%. The downside surprise relative to expectations has shifted the policy bias towards a RBA hold for the remainder of the year. Markets are now see just a 2% chance of a hike next month, down from 21% earlier, and are pricing the chance of year-end hike at 48%. Still, on Tuesday, RBA Governor Michele Bullock said underlying inflation remained too high and a further slowdown in domestic demand may be required to tame prices, though emphasized that the rate outlook remains uncertain as it was not yet clear whether the three rate hikes already delivered would be sufficient.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields are higher across the curve, which has steeped sharply following yesterday’s Fed hold. 30-year yields climbed to 19-year highs as market doubts over the Fed’s ability to tackle inflation prompted selling against the end of the curve. Meanwhile, this morning’s data showed modest real consumption growth with a very soft monthly inflation pulse, while the Q2 GDP estimate revealed a notable growth downshift driven by weaker government outlays and investment despite solid domestic private demand. Headline PCE -0.1% MoM to land at 3.7% YoY; core PCE +0.1% MoM at 3.3% YoY. Despite the “benign” reading, resilient consumer spending powered by wages, asset income, and benefits, point to sustained inflationary risks. Warsh reiterated that the market was pricing the risk of inflation, reacting in real-time. This raises some questions: is the market doing the Fed’s job for it? And has that reduced the optionality of the Fed and chances that it will raise rates this year? However, this could be a symptom of his preference for a lack of forward guidance, which has left Warsh with few to little words to describe the Fed’s thinking on inflation. In turn, the market took this as a dovish signal as it still feels a hangover from the Powell-led era.

Divided FOMC votes are rare, only about 31 meetings since 2002 produced a formal dissent of any size. Historically, single-dissent meetings dominate, while meetings with 2 or 3+ dissents are genuinely uncommon, making 2025-2026 an unusual stretch of Committee discord. Grouping these 31 usable episodes by the number of dissenters reveals a nonlinear relationship between dissent size and how likely policy is to shift at the very next meeting. Across all 31 tracked episodes, policy changed at the following meeting roughly 42% of the time, meaning a divided vote is a weak standalone predictor of an imminent shift. Two-dissent meetings show the clearest tendency toward near-term change (70% policy change rate at the following meeting), notably higher than either single-dissent (27.8%) or 3+-dissent meetings (33.3%, though with only 3 data points, this bucket is statistically thin).

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term.

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