The US dollar is lower compared to major currencies like the euro, yen, and pound. Key data releases today include US building permits, housing starts, and the University of Michigan preliminary sentiment index, expected at 61.5 up from 60.7 last month.
Fed’s Waller supports a 25bps rate cut in July due to rising risks and a weakening labour market, noting that delayed action could require stronger measures later. Waller sees GDP growth near 1% and considers policy should aim for a neutral stance, with the labour market on the “edge”.
Us Stocks Update
US stocks show modest increases, with S&P and Nasdaq reaching record highs. The Dow is up 71 points, S&P up 8.39 points, and Nasdaq up 15.96 points. Despite positive earnings, Netflix shares are 2.15% lower.
Notable earnings today: Charles Schwab beat earnings expectations with EPS at $1.14 and revenue at $5.85B. American Express posted an EPS of $4.08, exceeding expectations, and 3M reported EPS at $2.16 but missed revenue forecasts. After market, Netflix reported strong Q2 results with EPS at $7.19 and beat future outlook estimates.
US Treasury yields are lower, with the 30-year yield falling below 5.00%. The 2-year yield is at 3.877%, the 5-year at 3.960%, the 10-year at 4.425%, and the 30-year at 4.985%.
We see the current USD weakness as a trend with room to run, especially following the latest remarks from a key Fed official. The market is now pricing in an over 85% probability of a rate cut in July, according to the CME FedWatch Tool. This environment makes buying call options on pairs like the EUR/USD and GBP/USD an attractive strategy for the coming weeks.
Labor Market Outlook
The warning about the labor market being “on the edge” is a critical signal for us. We’ve seen this in recent data, with weekly jobless claims recently ticking up to 238,000, signaling a potential softening. A weakening jobs picture solidifies the case for a pre-emptive rate cut, further pressuring the dollar.
While equity indices are hitting record highs, this creates a confusing picture that suggests potential volatility ahead. With the CBOE Volatility Index (VIX) currently trading near a low of 13, options are relatively cheap. We believe it is prudent to consider buying protective put options on major indices as a hedge against any negative data surprises.
This “insurance cut” narrative reminds us of the mid-1990s when the central bank successfully navigated a soft patch without triggering a recession. That historical precedent suggests a single cut could be enough to calm markets for a few meetings. This supports a short-term trading view rather than a long-term bearish overhaul.
The bond market is strongly confirming this outlook, with yields falling across the curve. The 30-year yield dropping back below 5.00% is a significant psychological and technical level. For traders, this move in rates suggests that betting on continued or stable low yields via interest rate futures is aligned with the Fed’s likely path.
