🌟 Morning Summary
Market Sentiment: Cautious optimism amid policy uncertainty
Key Theme: Central bank divergence driving cross-asset volatility as growth concerns mount
Economic Outlook
Global Growth Trajectory
Global economic momentum shows signs of deceleration as we enter Q3 2025. The IMF revised global growth projections to 3.0% for 2025 and 3.1% for 2026, representing a modest upward revision from April but still reflecting persistent headwinds. The revision primarily stems from front-loading effects ahead of tariff implementations, improved financial conditions, and fiscal expansion in select major economies.
Regional Divergence Intensifying:
United States: Growth expectations moderated to 1.1% for 2025 as Trump administration policies create mixed impacts
Europe: Eurozone GDP growth projected at just 0.9% following US-EU trade deal implementation
Asia: China's consumption weakness partially offset by robust South Asian domestic demand
Emerging Markets: Latin America achieving milestone of contained inflation and fiscal consolidation, though navigating trade fragmentation risks
Inflation Dynamics
Central banks face the complex challenge of disinflation versus tariff-induced price pressures. UK inflation accelerated to 3.6% in June 2025, the highest since January 2024, driven by transport, food, and housing costs. This upside surprise complicates the Bank of England's easing trajectory despite broader economic weakness
US inflation remains above the Fed's 2% target, with core services proving particularly sticky. The Cleveland Fed's nowcasting models project PCE inflation at 2.74% and CPI at 2.86% for August, suggesting persistent price pressures.
Market Performance & Outlook
US Markets
Equity markets experienced heightened volatility following disappointing July employment data and renewed tariff uncertainties. The S&P 500 declined 2.4% for the week ending August 1, marking its worst weekly performance since May. Key developments:
Technology sector resilience: Despite broader weakness, AI infrastructure spending continues driving earnings growth, with companies like Meta, Microsoft, and Alphabet beating expectations
Sector rotation accelerating: Industrials (+15.4%) and materials (+13%) outperforming as investors position for infrastructure spending and supply chain reconfiguration
Earnings trajectory: 66% of S&P 500 companies exceeded Q2 earnings expectations, with blended growth rate of 10.3%
Asian Markets
Mixed performance amid policy divergence. Asia-Pacific growth expected to moderate slightly with China's consumption weakness creating headwinds. High-income technology exporters remain resilient, benefiting from robust global electronics demand. However, trade uncertainty and escalating tariffs continue weighing on investor confidence.
Fixed Income Markets
Bond markets positioning for central bank policy shifts. The 10-year US Treasury yield sits at 4.25%, near three-month lows as markets price in Fed easing expectations. Municipal bonds showing strength with $55 billion in reinvestment funds available in August, the largest amount ever.
Key yield levels:
US 10-Year: 4.25% (+0.02% daily)
US 30-Year: 4.83% (+0.01% daily)
UK 10-Year Gilt: ~4.6% following inflation surprise
Treasury Markets
Auction dynamics under scrutiny as the Treasury prepares $67 billion in bond auctions this week, including $42 billion in 10-year notes. Weak auction demand has raised concerns about long-term inflation risks and potential Fed leadership changes.
Yield curve steepening continues as 2-year/10-year spread widens to 0.53%, reflecting market acceptance of higher long-term borrowing costs. This provides more attractive income opportunities for long-term investors while signalling persistent structural challenges.
Central Bank Policy Divergence
Federal Reserve
Policy remains on hold at 4.25%-4.50% following July's unanimous decision, though internal dissent is emerging. Two Fed governors voted for cuts, marking the first time since 1993 that multiple members dissented. Key considerations
Employment weakness: July jobs report showed only 73,000 positions added versus 104,000 expected
Inflation persistence: Core services inflation remains elevated, complicating the easing path
Political pressure: Trump's public criticism of Chair Powell intensifies as his term approaches expiration
Bank of England (Today's Decision)
High probability of rate cut to 4.00% at today's MPC meeting, with markets pricing 97% probability despite June inflation surprise. The decision reflects:
Economic weakness: GDP growth slowing toward recessionary levels
Labour market deterioration: Unemployment rising in seven of past eight months
Split MPC expected: Analysts anticipate three-way vote split between cuts, holds, and deeper easing
European Central Bank
Maintaining steady approach following July's hold decision. ECB Governing Council member Holzmann indicated "steady hand" consensus, viewing current 2.0% deposit rate as appropriately expansionary. The ECB appears positioned for extended pause as trade uncertainty clouds the outlook
Cross-Asset Implications
Equities
Sector rotation intensifying as macro environment shifts:
Technology: Magnificent Seven maintaining dominance through AI infrastructure spending
Industrials/Materials: Benefiting from reshoring trends and infrastructure investment
Healthcare: AI-driven drug discovery creating optimism (+9% Q2 2025)
Energy: Oil sector facing headwinds from OPEC+ production increases and demand concerns
Commodities
Mixed outlook across complex:
Energy: Oil prices under pressure as OPEC+ increases production and China demand weakens. Brent crude forecasts average $65-70 per barrel for 2025
Metals: Copper heavily exposed to trade war risks given global growth sensitivity
Precious Metals: Gold maintaining safe-haven appeal amid geopolitical tensions
Agriculture: Coffee and cocoa volatility expected to continue given weather dependencies
Forex
Dollar strength moderating but structural challenges remain:
DXY: Retreated from recent highs following employment disappointment
EUR/USD: Corrected from 2025 highs after US-EU trade deal, now targeting 1.17-1.19 range
GBP/USD: Expected downside pressure following anticipated BoE cut today
Emerging Market FX: Under pressure from dollar strength and trade tensions
Bonds
Positioning for easing cycle:
Duration strategy: Favouring intermediate-term (5-10 year) high-quality bonds
Credit selection: Emphasizing investment-grade corporates over high-yield given growth concerns
Geographic allocation: Emerging market bonds outperforming (+3.14% in July)
Crypto Assets
Consolidation phase continuing: Bitcoin market cap corrected to $3.67 trillion from July peak of $4.0 trillion. The 6.7% decline in August attributed to profit-taking rather than systemic weakness. Institutional accumulation continues despite retail rotation into micro-cap tokens.
Key Risk Factors: Trade policy uncertainty, central bank policy divergence, China growth trajectory, geopolitical tensions (Middle East, Russia-Ukraine)
Tactical Positioning: Favour quality over risk, maintain flexibility across regions and asset classes, hedge tail risks through diversification
Tomorrow’s Update: Focus on BoE decision aftermath, US CPI data, and Jackson Hole preparation
Risk Disclaimer: This analysis reflects current market conditions as of August 6, 2025. Rapid changes in economic data, geopolitical developments, or central bank communications could materially alter the outlook. Diversification and appropriate risk management remain essential in the current environment. None of this is financial advice, Wizard Macro Research cannot be held responsible for any losses