US stock indices, including the NASDAQ, finished higher, with the NASDAQ reaching a new record. The Dow Jones rose by 0.52%, the S&P 500 climbed 0.54%, and the Russell 2000 increased by 1.20%. European markets also gained, with Germany’s DAX up 1.52% and France’s CAC rising 1.29%. In the UK, the FTSE 100 went up 0.52%, Spain’s Ibex rose 0.78%, and Italy’s FTSE MIB increased by 0.92%. US retail sales in June jumped by 0.6%, exceeding the expected 0.1%. Initial jobless claims fell to 221,000, which was better than the forecast of 235,000. The Philadelphia Fed Business Outlook Index rose significantly to 15.9 from the predicted -1.0. Meanwhile, the Atlanta GDPNow forecast for Q2 was adjusted down to 2.4% from 2.6%.

Fed Members Cautious On Inflation

Members of the Federal Reserve expressed caution concerning inflation and tariffs. Core PCE is above the target at 2.8%. In the bond market, yields changed little: the 2-year yield is at 3.906%, the 5-year at 3.992%, the 10-year slightly dropped to 4.453%, and the 30-year yield decreased to 5.009%. In the currency market, the USD ended higher against major currencies, despite an initial decline during the session. Currencies like the EUR, JPY, and GBP experienced only slight changes against the USD. In this environment, there is a clear mismatch between the cautious Fed and the upbeat stock market. Positive reports, such as the 0.6% rise in retail sales and the drop in jobless claims to 221,000, leave the Federal Reserve little reason to cut interest rates. This data strengthens the case for maintaining a tight policy to fight inflation. Officials like Kugler and Bostic consistently signal a steady approach. Recent central bank predictions suggest only one rate cut this year, a big drop from the three cuts expected a few months ago. Daly’s comments reinforce this cautious outlook, indicating that while easing may eventually happen, it won’t be soon.

Potential Policy Shifts And Market Implications

This cautious stance contrasts sharply with stock markets, which keep reaching new highs. Historically, such gaps between policy and market performance don’t last long. With the CBOE Volatility Index (VIX) recently below 15, market complacency seems high. This indicates that buying protective put options on indices like the S&P 500 or investing in long volatility positions could be wise. Warsh’s sharp critique introduces a political wildcard for the Fed’s leadership and policy direction. His call for “regime change” and concerns about the board’s understanding of trends like AI could lead to unpredictable policy shifts. It’s important to monitor any changes in political rhetoric regarding the Fed’s future, as this could significantly affect market sentiment. Currently, the US dollar is benefiting from these dynamics, gaining against major currencies due to its relative economic strength and higher yields. While bond yields varied, strength at the short end suggests the market does not expect rate cuts soon. Strategies that invest in the dollar, especially against currencies from dovish central banks, appear well-supported by the current fundamentals. Create your live VT Markets account and start trading now.

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