Bessent on Bloomberg TV mentioned that around 100 countries are likely to adopt a minimum tax rate of 10%. This aims to create a baseline for future tax agreements. However, there are still uncertainties in negotiations with Japan, the EU, Mexico, and Canada. These issues might make a zero tax rate hard to achieve.

Global Tax Coordination

Bessent’s recent comments suggest a significant shift in global tax coordination, with about 100 countries expected to adopt a minimum reciprocal tax rate of 10%. The aim is to prevent countries from competing excessively on tax rates to attract capital. Instead of allowing tax rates to drop to zero, this establishes a clear lower limit. Even if talks with the EU, Japan, Mexico, and Canada are still unresolved, broader efforts to align tax policies across countries are advancing. These negotiations might take weeks or months due to local politics and trade policies, but the overall goal of a more streamlined agreement is still on the horizon. A zero tax rate now seems even less likely. In the short term, it’s important to consider how these tax developments impact investor expectations. This is particularly relevant in interest rate markets, where medium-term inflation predictions often depend on fiscal policies. Traders should be aware that there’s now a more stable foundation for tax revenues. Regions with lower voluntary tax collections and larger deficits may face increased scrutiny from market participants. Derivatives traders observing yield spreads in relevant bond markets or adjusting expectations in currency pair volatility should be cautious. They shouldn’t base future policy expectations solely on domestic political news. As these international tax discussions progress slowly, short-term price fluctuations could arise among economies aligned with the OECD.

Impact on Liquidity Patterns

In terms of liquidity patterns, especially during monthly options cycles, we may notice changes in gamma positioning from dealers as new tax developments influence broader macro themes—particularly profit repatriation strategies among multinational companies. We saw a similar situation in 2017 and 2018 when US tax reforms altered capital market flows unexpectedly. These changes rarely fit neatly into typical currency or bond pricing. Therefore, we are closely monitoring minor shifts in two-week and one-month implied volatilities across affected currencies. Low-delta options in these pairs, previously seen as stable, may start to move as underwriters adjust to new scenarios. These smaller shifts, rather than huge breakouts, are likely where structured products desks and fast-money traders can find mispricings. While headlines focus on long-term tax structures, we are more interested in how this influences next month’s positioning. When implied volatility changes before known events, experienced traders adapt. This is where risk is being identified and reassessed. Create your live VT Markets account and start trading now.

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The Baker Hughes weekly rig count shows fewer active rigs this week, dropping by 8 to a total of 539. Specifically, oil rigs fell by 7 to 425, while natural gas rigs decreased by 1 to 108. Crude oil prices went down by $0.52 or 0.77%, now trading at $66.94. However, over the week, prices increased by 2.95%. Compared to last year, prices have dropped by 6.78%. Today, the lowest price for crude oil was $67.54. Even though prices have decreased, they are still above the midpoint of April’s low at $66.33. The 200-hour moving average is slightly lower at $66.30. We are observing a steady decline in drilling activity, with the rig count now below 540 total rigs. This is a significant drop from past peaks. The biggest decrease was in oil rigs, which lost seven units, while gas rigs fell slightly as well. Such reductions often lead to less output in the future, affecting price trends. Oil prices have decreased modestly today, down just over half a dollar. Yet, they have gained nearly 3% over the past week. So, while today’s movement appears negative, it doesn’t indicate a larger weakness. Instead, it may reflect short-term adjustments based on technical factors, or simply buyers taking a break. Prices hovered near today’s low of $67.54, comfortably above the recovery midpoint from April’s low of $66.33, indicating a current upward trend. The 200-hour moving average is just below this at $66.30, and it has not been tested yet. It could be important for short-term direction. From a trading perspective, it’s crucial to monitor these two levels. If prices dip below either, we may see quicker movements downward. We shouldn’t expect a smooth break through these thresholds. The weekly price gain contrasts with the overall downward trend this year. This week’s bounce might just be a brief correction. For those following price movements, upcoming sessions will be sensitive to news on inventories, economic data, and signals from energy producers. With softer drilling activity and prices above key technical supports, the focus may shift to whether prices can establish a short-term floor or will test lower moving averages. If current levels hold into early next week, we may see further upward movement. However, if prices fall below $66.30, this week’s progress could reverse. Traders should adjust their strategies based on the overall evidence, not just a single movement. With rig counts declining and prices in a middle range, the situation could shift either way. Corrections can happen quickly when liquidity decreases. Stay alert, keep your charts visible, and watch for signals. Quiet Friday closes might not remain that way.

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The major stock indices ended higher, with the NASDAQ leading the way. U.S. job data surpassed expectations, reporting an unemployment rate of 4.1% and a nonfarm payroll increase of 147,000, which was more than the anticipated 110,000. In the nonfarm payrolls, 147,000 jobs were added, with 74,000 in the private sector and 73,000 in government. The government jobs were mainly in state and local education, while healthcare added 39,000 jobs.

Sectors and Job Changes

Most sectors saw little to no changes, including wholesale trade, retail trade, and transportation. Manufacturing lost jobs again, but construction gained 15,000 jobs. Nearly half of the overall job increase came from government hiring. Key index statistics highlighted the following: – The Dow rose by 344.11 points or 0.77% to 44,828.53. – The S&P increased by 51.93 points or 0.83% to 6,279.35. – The NASDAQ gained 207.97 points or 1.02% to 20,601.10. For the week, the Dow increased by 2.30%, the S&P by 1.72%, the NASDAQ by 1.62%, and the Russell 2000 by 3.52%. Year-to-date, the Dow is up by 5.37%, the S&P by 6.76%, the NASDAQ by 6.68%, and the Russell 2000 by 0.84%. In summary, the trading week ended strongly, with all key U.S. indices showing gains. The NASDAQ performed the best, while the Russell 2000 is also recovering. The job data was better than expected, with both public and private sectors contributing. Notably, a significant portion of the job growth came from government hiring, particularly in education. This indicates that demand in the private sector remains uneven. Healthcare continues to grow steadily, adding 39,000 jobs, while major sectors like retail, wholesale, transportation, and information had little change. Manufacturing faced another decline, raising concerns that don’t align with the overall stability elsewhere. Construction, however, added 15,000 jobs. This sector often responds to interest rate changes and consumer confidence, suggesting that this job growth might be a reaction to anticipated shifts in rates.

Market Reactions and Future Outlook

The markets reacted positively—with substantial gains for the S&P, NASDAQ, and Dow—indicating confidence in growth trends and the belief that inflation may not rise again soon. All indices are now showing strong yearly performance, demonstrating renewed buying momentum. Historical data suggests when the S&P and NASDAQ show over 5% gains midway through the year, further upside in large-cap stocks is likely. Weekly performance showed broad gains, especially in the Russell 2000, which climbed over 3%, reflecting renewed interest in small-cap stocks. This market response signals confidence in continued growth without severe setbacks. The unemployment rate of 4.1% is slightly higher than before, but it coincides with strong job additions, indicating more people are entering the workforce—hardly a sign of instability. Looking ahead, attention should focus on areas with growing discrepancies. The ongoing weakness in manufacturing is a concern, especially compared to gains in services. Traders may want to approach industrial stocks carefully, considering stronger healthcare against weaker manufacturing. As core indices remain above key technical moving averages, there’s room for momentum strategies. However, the increase in range-bound volatility, especially in shorter-term contracts, adds complexity. Participants in volatility must be alert to day-to-day changes while paying close attention to macroeconomic calendars and upcoming earnings seasons. Cash volumes were light to moderate heading into Friday’s close, which might imply that some funds are still waiting to invest significantly. Tech strength continues to look favorable. With the NASDAQ outperforming, strategies involving asymmetric call structures and calendar spreads toward late Q3 expiry are still relevant. Future shifts in the market may depend more on inflation updates or comments from central bank officials rather than employment numbers, as wage growth has remained flat, and most new jobs are in education-related sectors. Expect continued strong correlations between bond yields and cyclical sector performance. Fixed income markets did not push 10-year yields higher despite positive jobs data, indicating that traders do not anticipate immediate rate hikes. There may be a resurgence of steepeners and duration bets in fixed income, influencing short-term equity derivatives. As the NASDAQ and S&P charts indicate upward trends, straddles and calendar call diagonals will require extra attention in case of any pullbacks. With established weekly gains, we don’t expect complete retracements due to minor macroeconomic events. Last week’s options trading showed decreased put activity and a flatter skew. If this pattern continues and the VIX remains stable, we’ll prefer defined-risk bullish strategies, especially those with breakeven points below current levels while still maintaining significant potential. Keep an eye on sector-specific ETFs for further insights, particularly in regions seeing construction growth. Deal flow in transportation and services has been slow, so adjustments to pair strategies may be necessary. In this environment, gains are unlikely to be pursued aggressively without some corrective phases. However, given that half of the week’s job additions came from government sectors and inflation remains subdued, the current macroeconomic outlook remains supportive—for now. Create your live VT Markets account and start trading now.

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The US dollar fluctuated after the non-farm payrolls report. At first, it gained strength, but then it fell against the euro, pound, and commodity currencies within hours. Profit-taking happened in euro positions, likely due to expected US-EU talks over the weekend. Based on past events, we can anticipate further changes and volatility in this situation. Meanwhile, the USD/JPY pair made gains, thanks to a 9 basis points rise in US 2-year yields and an increase in risk assets. The S&P 500 rose by 0.85%, getting close to its daily high, with USD/JPY nearing its peak for the period. Initially, the dollar strengthened after the non-farm payrolls data. Markets interpreted the figures as a sign for tighter monetary conditions, but that reaction quickly faded. The dollar lost value again, especially against high-beta currencies and stable major currencies. This signals a fragile sentiment. After some time, it seemed that investors reassessed the data, perhaps due to softer inflation expectations or worries about the labor market’s strength. The profit-taking in euro positions indicates that some traders are reluctant to hold large positions ahead of known risks. The upcoming talks between the US and EU on issues like trade and digital regulation have historically influenced short-term market signals. When traders decrease their exposure, it usually results in lower liquidity and more volatile price movements. As the week progresses, we might notice tighter trading ranges until news from policymakers is available. Regarding USD/JPY, the rise in US yields isn’t surprising when they jump by nearly ten basis points. A 9 basis point increase in the 2-year yields suggests stronger rate expectations, which typically strengthens the dollar against currencies with flatter yield curves. It’s not only bonds driving these changes; the rise in risk assets like stocks shows renewed investor interest, pulling capital into sectors that benefit when sentiment is positive. This further weakened the yen, as there wasn’t much short covering happening. Additionally, the S&P 500 approaching its session highs creates a feedback loop, where rising stock prices lower demand for safe-haven currencies. In pairs like USD/JPY, which often move in tandem with US stock performance and short-term real rates, this dynamic is especially active. Notably, there hasn’t been much talk from Japan about intervention, which allows traders more freedom. This environment requires careful attention to flows. If pricing continues to reflect interest rate speculation rather than strong data backing, volatility in short-term spreads will likely remain high. Directional trades need solid justification beyond broad risk signals. We are also monitoring options pricing, where implied volatility is above recent averages, indicating that positioning is still defensive rather than directional. In the upcoming sessions, price sensitivity to interest rate discussions will likely stay high. What we observe in price action is reactive rather than predictive. Misinterpreting sentiment shifts could lead to forced adjustments, especially in strategies reliant on leverage tied to rates and equity momentum. It’s wise to focus on yield differences and divergence themes instead of getting caught up in the latest headlines. Movements in spot FX showcase a real struggle between rate expectations and political uncertainty—something we have witnessed in previous cycles. Looking ahead, short-term strategies may continue to dominate, as timing remains challenging. Markets are still reacting rather than showing commitment.

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The Atlanta Fed GDP tracker shows a small increase in GDP, now at 2.6%, up from 2.5%. The advance GDP report is set to be released on July 30. Recent data from different US agencies have influenced these forecasts. The nowcast for real personal consumption expenditures growth for the second quarter rose from 1.5% to 1.6%. Additionally, real gross private domestic investment growth improved from -11.9% to -11.7%.

Forecast For Government Expenditures Growth

The forecast for second-quarter real government expenditures growth also increased, going from 2.0% to 2.3%. These numbers indicate changes in economic activity across several areas. Overall, these figures suggest a slight improvement in the expected economic growth for the second quarter in the United States. The GDP forecast adjustment from 2.5% to 2.6% comes ahead of the official advance GDP report later this month. These updates are driven by revisions related to consumer spending, business investment, and government expenditure, each influencing traders’ expectations for future movements. The increase in real personal consumption expenditures, even a small rise of 0.1 percentage points to 1.6%, indicates that household spending may be gaining more momentum than we thought. While modest, this change suggests consumers feel some confidence despite broader concerns. For market participants, this alone may not cause drastic shifts, but any increase in consumer activity often affects assumptions about future inflation. Private domestic investment still shows contraction but has been revised slightly less negatively—from a drop of 11.9% to 11.7%. This still shows significant weakness, particularly in equipment and construction areas. However, the slight improvement suggests that some sectors may be stabilising or not declining as sharply as expected. This could influence expectations for future capital spending and how it affects corporate balance sheets.

Impact On Government Spending Forecasts

The increase in government spending forecasts to 2.3% from 2.0% adds support to overall growth estimates. Federal, state, and local budget contributions vary, but this combined rise suggests that public sector demand remains strong. This can help offset weaknesses in other sectors, like housing or equipment investment. While government spending typically does not drive core inflation, it can have secondary effects, especially alongside ongoing service sector support. Considering everything, we see a changing mix of inputs that may slightly shift the risks perceived in some short-term interest rate instruments. These changes could lead to small adjustments in the middle of the curve. A consistent approach—focusing on how small revisions align with previous expectations—continues to provide the clearest insight. Therefore, we should monitor not just the main figures but also the secondary components. These smaller changes can accumulate and cause pricing inefficiencies to persist longer. Minor shifts in consumption or investment could impact discounting behavior more than overall growth rates would initially suggest. With the GDP report due at the end of the month, any further tracking adjustments in regional Fed models will be important. They could support or challenge the current view of whether the economy is gradually cooling or showing unexpected strength. This narrative, in turn, affects how curve steepeners or flatteners perform over both short and intermediate timeframes. Carefully watching these small movements helps us understand how relative value desks react as flows begin to reposition. As expectations stabilise, we may see spreads revert or widen based on how the momentum in each area is perceived. Create your live VT Markets account and start trading now.

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Scott Bessent, the Treasury Secretary, talked about the economy, stating that tariffs haven’t harmed the market. He prefers the market’s perspective over economists’ predictions and pointed out that a lot of Vietnam’s trade is just a transfer from China. This suggests that tariffs aren’t causing inflation. He also mentioned Greer’s upcoming study on EU trade, warning countries that their rates might go back to where they were before. Regarding Japan’s election on July 20, Bessent is looking forward to the results. He noted that the UK is seen as a good trade partner and highlighted the number of jobs from state and local governments. Despite a positive jobs report, Bessent pointed out that there are ups and downs due to timing factors, like when teachers get hired or let go. He is optimistic that spending will increase after the budget bill. Bessent acknowledged there are many strong candidates for the Federal Reserve chair position and plans to discuss this in the fall. Although Bessent’s remarks didn’t present groundbreaking news, they provided valuable insights. He differentiated between market sentiment and traditional economic theories, emphasizing that real market actions matter more than theories. His view that tariffs haven’t led to inflation indicates that the causes of inflation may have changed or become more complex than standard models suggest. His note about Vietnam’s trade being linked to China shows how intertwined trade can be, making the argument that tariffs solely drive prices higher weaker. When he referenced Greer’s upcoming EU trade analysis, it hinted at a renewed focus on trans-Atlantic relations. This suggests that current interest rates might not remain stable. It’s a subtle warning that yields could return to historical levels. This could lead to more volatility in global fixed income, especially if positions lean towards a low-rate environment. Bessent also emphasized Japan’s upcoming election as an important event to watch. Once political uncertainty is resolved, any changes in fiscal or monetary policy could affect yen values and JGB yields. Currency markets may not react immediately, but any signs of post-election policy shifts could change that quickly. We are looking for indicators that might lead us to adjust investments in Japanese assets. His comment about the UK’s reputation as a trade partner was notable. It indicates that despite broader geopolitical tensions, some trade relationships are still seen as dependable. This reliability helps stabilize the value of the sterling. However, job contributions from the public sector, especially at the state and local level, can be unpredictable. Hiring and firing teachers based on the school calendar can skew payroll data. This variability means that reacting to one jobs report can lead to misunderstandings. Bessent’s optimism about increased spending after the budget bill should not be viewed as an immediate surge. These investments take time to develop, and markets might start factoring in growth prospects even before firm data comes in. It’s important to look at not just who is spending more but also when that spending will have an effect. Bessent’s belief that there are many strong candidates for the Fed chair position is another pointer for the future. With names being discussed and a timeline extending into fall, speculation might grow before it narrows. This could lead to rate-sensitive investments responding to perceived shifts in policy approach. We should keep this in mind as we move into the late third quarter. Even though Bessent didn’t make headlines with his comments, they collectively reaffirm a point: market conditions matter more than forecasts. The upcoming weeks should focus on this idea: stay less attached to macro predictions and pay more attention to where implied volatility increases. Rates, currencies, and equity positioning all connect here. It’s essential to watch for policy hints, election results, and actual spending trends rather than relying solely on consensus views.

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Bessent is confident that the US will see its GDP grow faster than its debt increases. He is skeptical about the Congressional Budget Office’s (CBO) growth predictions, thinking they might be too negative or based on unlikely assumptions. The tax bill vote is scheduled for 1:30 PM, as mentioned during a CNBC interview.

Economic Growth Versus Government Debt

Bessent believes the US economy will grow faster than government debt. He questions the CBO’s forecasts, thinking they might be overly cautious. The timing of the tax bill vote could influence interest rates and stock prices, depending on how the market views its long-term impact on the budget and growth. This moment is crucial for those dealing with rate-sensitive products, especially since volatility has decreased recently. Rate markets are trying to figure out how much fiscal stimulus might occur, making short-term contracts a primary focus. While longer-term rates have moved somewhat, traders may still be preparing for unexpected changes. Yields are slowly adjusting, driven mainly by traders reducing their hedges on 2-year and 5-year instruments. It’s a gradual shift back to neutral after weeks of uncertainty. This is important to watch, especially if the tax bill passes with changes that raise projections.

Market Positioning and Reactions

We see that the skew in rate volatility has become quite lopsided since Monday. Trades aimed at exploiting this imbalance are experiencing lower offers. Additionally, teams dealing with different assets have begun to adjust volatility rates in response to the renewed fiscal discussions, suggesting that equity-related hedges may begin to affect the rates market. Sterling products remain mostly isolated, but this could change quickly. Clear signals about US policy usually influence EUR and GBP volatility due to rebalancing in CTA baskets. Traders using synthetic curves or steepener strategies may want to consider the impact of a significant shift in US policy bias. As the vote approaches, implied volatility in near-term contracts has increased by about 1.5 vols since yesterday, showing a growing demand for protection or participation linked to events. Any further rise in volatility may lead to calendar spreads among larger macro investors. Our trading activity this week has focused on the middle of the curve, where differences between implied and realized volatility are creating better entry points. While there’s no widespread panic, there is a strong interest in gamma, particularly for swaption hedges. This indicates that while real money isn’t looking to take major risks, they are not willing to stay unprotected. Bessent’s comments and the approaching vote suggest we may see short bursts of movement rather than a long-term trend. Directional trades may gain more traction after the vote. For now, short-term options offer clearer reward-to-risk ratios, especially since intraday volatility often settles by the end of the day. With volatility already priced in and gamma in demand, maintaining low delta exposure may provide better flexibility. Create your live VT Markets account and start trading now.

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US Deputy Treasury Secretary Faulkender recently pointed out that Japan is dealing with issues caused by non-tariff barriers, which are affecting trade and economic relations. At the same time, US Treasury Secretary Bessent is preparing to speak publicly. He is set to appear on CNBC soon. Faulkender’s comments highlight ongoing trade tensions that are not always visible in the usual indicators. By mentioning non-tariff barriers, he emphasizes issues like delays in licensing and restrictions on foreign firms. These obstacles limit market access without changing tariffs directly, which can subtly distort trade flows and impact investment and pricing if they continue or worsen. Bessent is taking a more direct approach. His upcoming remarks will likely echo Faulkender’s points and may expand on recent policy directions or financial strategy updates. If he provides clear information, it could positively influence market sentiment, especially since uncertainty in cross-border communications often leads traders to become more cautious or reduce their exposure entirely. We are already seeing a shift—traders are being more cautious following Faulkender’s statements. Pricing for forward contracts has decreased slightly, but trading volume remains steady, suggesting that traders are processing the news before making changes. It’s important to take a measured approach, as there isn’t a clear signal yet. However, the relationship and trust between trading partners may be weakening, which could lead to challenges in international pricing. Those handling short-term interest rate contracts or volatility spreads should pay attention to Washington’s message. Political and economic risks are influencing market expectations. This isn’t cause for alarm, but it does suggest a change in mindset. Current spot prices may not yet reflect this, but option premiums and skew structures are beginning to show a more cautious stance. This indicates a shift in attitudes, particularly in yen-related trades, not driven by panic, but by a careful adjustment that could become tighter if uncertainty continues. When Bessent speaks, the nuances of his message will be as important as the content itself. In the past, he has preferred structured communication, and this could benefit listeners who look for deeper meanings—not just the “what,” but the “how” of his message. If he suggests taking a wait-and-see approach or makes ongoing evaluations, it may be seen as a signal to hold back rather than a green light to proceed. We’ve adjusted our strategy accordingly, minimizing impulsive trades and focusing on longer-term positions and options. All of this comes just before key economic indicators are released, adding complexity to the situation. Historically, when political messaging doesn’t align with economic releases, it can lead to increased volatility. This occurs not necessarily because of the data itself, but because traders are uncertain about whether to react to sentiment or statistics. There may not be a direct connection to immediate interest rate changes, but if Bessent hints at a willingness to change trade terms, it could alter market expectations. None of these recent moves indicate panic, but they do suggest a reassessment is taking place. If concerns over regulations are becoming more central rather than a minor detail—whether through comments or market responses—traders might need to evaluate whether to maintain their positions through upcoming calendar events without safety measures. A small change now could lead to larger consequences if clarity doesn’t come quickly.

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Weekly Performance Summary

As the week ends, major indices are showing gains, with the S&P and NASDAQ reaching record highs. The Russell 2000 is the week’s biggest winner, rising over 3.3%, while the Dow industrial average is up 2.37%. The NASDAQ has been on a winning streak since April, although there’s been a shift away from large tech stocks. It still shows a weekly gain of 1.58%. Here’s the weekly performance breakdown: Dow industrial average up 2.37%, S&P index up 1.71%, NASDAQ index up 1.58%, and Russell 2000 up 3.346%. Markets are in a strong position as we approach the holidays. Recent trading has shown that investors are diversifying, moving away from tech stocks and towards value and smaller companies. This trend is evident in the Russell’s significant rise compared to larger stocks. While the S&P and NASDAQ reach new highs, the Russell’s sharp gains suggest a growing appetite for risk beyond the usual big names.

Sector Rotation and Market Sentiment

The overall gains indicate increasing confidence in the soft-landing scenario. This week’s data has not created any major disruptions, allowing traders to invest in stocks without needing to hedge against short-term risks. The lack of major economic concerns, at least for now, provides a stable environment for reassessing long-term strategies. Looking at trading flow, there was heavy options activity earlier this week, especially in broader indices and small-cap stocks. This activity seems justified given the steady rise in prices. Options traders should be aware that gamma effects might increase short-term movements, particularly during the quieter holiday trading when liquidity may be lower. While tech stocks have led the market up until now, the recent shift towards industrials, financials, and small caps is important. Such rotations often lead to sustained gains if the economic landscape remains stable. This suggests that earlier investments were heavily skewed and are now adjusting towards sectors with better valuations or stronger ties to domestic economic recovery. Create your live VT Markets account and start trading now.

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Adjustment of prices due to trade and other policies will likely be slow and complicated, possibly taking a year or more. However, the labor market is strong, showing no signs of major decline. The U.S. is expected to face a period of increased inflation. Given the current uncertainties, changing monetary policy right now would not be wise.

A Wait And See Approach

The preferred approach to interest rates is to “wait and see.” This reflects the economy’s strength, but there is a risk that high inflation could alter how consumers think. The Federal Reserve may need to clearly show its commitment to stable inflation expectations. Currently, businesses are delaying hiring and investments, fearing that demand may stagnate or drop if costs continue to rise. Recent positive inflation data comes from businesses holding off on price hikes to better understand the impact of final tariff levels. This situation paints a complex picture of prices influenced by international trade and domestic policies. The effects won’t appear quickly; we’re looking at a timeframe that stretches into the next year, not just a quarter or two. On the positive side, the labor market remains strong with job growth and no major stress on existing positions. Despite this backdrop, it is becoming evident that inflation isn’t decreasing as quickly as some hoped, and it will likely remain above desired levels. The Federal Reserve is choosing a cautious approach. Instead of raising rates too quickly, which could hinder business activity, they prefer to observe and keep options open as the effects of current rates unfold.

Consumer Psychology And Inflation Expectations

The mention of consumer psychology raises an important point: if prices stay high, people’s spending habits may shift even without new shocks. Households expecting higher prices might start buying earlier or reduce discretionary spending. Both scenarios could further influence inflation trends in either direction. Chairman Powell and his team may need to reinforce their commitment to price stability more clearly. Consistently communicating this message, whether through policy statements or press comments, could help stabilize expectations. This is especially critical if wage growth remains high and inflation in services doesn’t ease. For now, the belief is that interest rates are sufficiently high, but the Federal Reserve will not declare success until there’s clear evidence of a stable downward trend. Business hiring delays and capital investment deferments indicate uncertainty, not immediate distress. Companies are cautious about costs; if input prices rise again or tariffs affect profit margins, these delays could lead to outright cuts. The reluctance to raise prices quickly despite cost pressures suggests a balance between pricing power and customer retention. Companies are observing whether tariffs will become permanent or be rolled back after negotiations. Until that is clear, they will remain cautious—especially those who can afford it. This indicates that inflation data may remain volatile, particularly if postponed price changes start to appear in the upcoming quarters. Tracking inflation weekly could become increasingly sensitive. We might see erratic shifts in rate expectations based on sudden changes in retail or service pricing. Long-term exposure to rate-sensitive products may require tighter risk management. We need to prepare for potential sudden price adjustments following any Fed communications that clarify or change their current cautious approach. If businesses begin to raise prices widely, the market may need to respond quickly. This could impact everything tied to expectations, from swap rates to option pricing. In rate derivatives, the gradual process of change doesn’t mean little action; it means that more must be based on future signals rather than just past data points. Create your live VT Markets account and start trading now.

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