GDP Revisions Send Short-Term Yields Higher

INTEREST RATE MARKET FUTURES

Futures are lower at the front-end and higher at the long-end following the release of revised Q2 GDP figures. The release of stronger-than-expected Q2 GDP data, showing a 3.3% annualized growth rate and upward revision to consumer spending, led markets to anticipate a more hawkish stance from the Federal Reserve. This pushed short-term Treasury yields higher, reflecting expectations of tighter monetary policy or a prolonged period of elevated interest rates. At the same time, longer-term yields declined as investors weighed signs of weakening investment and exports, moderating inflation, and the potential for slower growth ahead suggesting a more cautious long-term outlook and possible future easing.

Concerns over the removal of Governor Lisa Cook have been evident in Treasury yields with markets expecting a board with a more dovish tilt. The prospect of monetary policy that could be looser than necessary  has raised concerns that the board could lose its grip on inflation, which in recent days has sent short-term yields lower and longer-term yields higher as inflation expectations increase. The closely watched yield curve comparing two- and 10-year Treasury yields steepened to its highest since April intraday on Tuesday, while the premium of 30-year yields over two-year yields surged to its highest since early 2022.

Wednesday’s $70 billion five-year note auction drew mixed interest, stopping at 3.724% vs. a six-auction average of 4.025% and tailing by 0.7 basis points. The bid-to-cover ratio came in at 2.36 vs. a 2.37 average. Indirect bids totaled 60.5% vs. the 69.3% average, while direct bids surged to 30.7% vs. a 19.4% norm, leaving dealers with an 8.8% take compared to the 11.2% average. This follows Tuesday’s $69 billion two-year note auction was met with aggressive bidding and high non-dealer demand.

Friday’s July PCE price index will be closely watched. Stronger inflation could reinforce expectations of a slower easing path, pushing expectations of a September cut to October or later in the year and providing support for higher yields, while a softer reading should weigh on yields. Fed funds futures are pricing an 85% chance that the Fed will cut rates by 25 bps in September. There is still a high degree of uncertainty when it comes to the interest rate path, and recent PMI and PPI data has shown significant indications that inflation could persist for the coming months and peak in the fall.

The spread between the two- and 10-year yields fell to 58.8 bps from 63 bps on Wednesday.

STOCK INDEX FUTURES

Stock index futures are little changed in the overnight session as investors further digest Nvidia’s earnings and await Friday’s PCE inflation data. Nvidia beat earnings, however its shared dropped as much as 3.5% after it reported disappointing data-center sales. The chipmakers shared pared loses in the aftermarket session. Nvidia stressed that chip demand is healthy, and CEO Jensen Huang touted “extraordinary” demand for the company’s Blackwell AI chips and said that he sees China as a $50 billion opportunity.

Weekly initial jobless claims came in just under expectations, with 229,000 new claims vs. an expected 231,000 and remaining above the four-week moving average of 228,500.

Second quarter GDP was revised up by 0.3% from 3.0% to 3.3%, by a decrease in imports, which are subtracted in GDP calculations, and a pickup in consumer spending, though it was partially offset by declines in investment and exports. Real final sales to private domestic purchasers, a key measure of underlying domestic demand, rose 1.9%, up from the previous estimate of 1.2%. On the income side, real gross domestic income (GDI) surged 4.8%, and the average of GDP and GDI rose 4.0%, signaling broad-based economic strength. Corporate profits also rebounded, increasing by $65.5 billion after a sharp decline in the first quarter.

Friday’s highly anticipated PCE inflation data, which will be a key piece of data in determining whether or not the Fed may cut rates in September. The second estimate of second-quarter GDP and weekly jobless claims data are due on Thursday, and the University of Michigan’s final consumer survey for August is set for release on Friday.

CURRENCY FUTURES

The USD index edged lower in overnight trade after losing ground on Wednesday following remarks from New York Fed Chief John Williams that a rate cut in September was possible. Williams said in an interview on Wednesday that it is likely interest rates can fall at some point, but policymakers will need to see what upcoming data indicate about the economy to decide if it’s appropriate to make a cut at the September meeting. The dollar has also remained under pressure from President Trump’s efforts to remove Fed Governor Lisa Cook and if successful, replace her with a more dovish leaning candidate. A key piece of data in gauging whether or not a September cut is on the table will be tomorrow’s PCE inflation data for July, which serves as the Fed’s preferred measure of inflation. A strong reading, especially with an uptick of inflation in the services sector, will likely dull bets of a rate cut in September while anything on the mark or below could add to expectations that the Fed will resume its easing cycle. Markets are currently pricing in a 85% chance of a 25 bps cut at the September meeting.

Euro futures are higher on a weaker dollar. Economic sentiment in the EU fell to 95.2 from 95.7 in July, as sluggish growth weighed on sentiment, while households and businesses both reported little hope for a major rebound in the future. The worsening sentiment is likely in response to the trade deal the EU reached with the US at the end of last month that will see a baseline 15% tariff applied to EU exports. That will hit the bloc’s exporters, notably in Germany, where the economy shrank 0.3% over the second quarter amid tariff turmoil and underlying weaknesses. In France, meanwhile, the minority government is likely to collapse in the coming weeks after premier Francois Bayrou called a confidence vote he is likely to lose, as the government faces fiscal problems. Friday will be a big day for eurozone data. Provisional inflation figures for August from Germany, France, Spain, and Italy will be released, alongside German labor market data for August. German retail sales for July are also due Friday, plus a string of data from France, including July consumer spending, producer prices, and second-quarter jobs figures. Italy will also publish second-quarter GDP.

British pound futures nudged higher, getting lifted from a weaker dollar in a quiet week on the economic calendar for the UK.  Bank of England MPC member Catherine Mann signaled support for keeping rates steady for an extended period but remains open to sharp cuts if growth deteriorates. She warned that wage growth remains too high to support a return to the 2% inflation target, though she opposes further tightening given the UK’s fragile economic outlook. Money markets now see only around a 36% probability of a quarter-point reduction this year, and the next cut is likely priced in for spring 2026. This comes after a hot inflation print last week, which saw inflation rise to 3.8%, although many of the price pressures are expected to be one-off. Still, the inflation remains well above the Bank of England’s target, and in its most recent policy meeting, policymakers signaled they were more concerned with rising inflation than they were with supporting the economy.

Japanese yen futures advanced over against the dollar as markets look ahead to Tokyo inflation figures due later on Thursday, which are considered the leading gauge of nationwide trends. Investors will be looking for more signals on the inflation front as the BoJ looks to raise interest rates in the near future. Speaking at the Federal Reserve’s Jackson Hole conference on Saturday, Bank of Japan Governor Kazuo Ueda said wages in Japan are expected to rise further amid a tightening labor market, signaling confidence that conditions for another interest rate hike are coming together. Following stronger-than-expected second-quarter growth, investors will look to the next batch of data for confirmation of the economy’s health. Elsewhere on the data front, retail sales, labor market, and industrial production data are due for release later in the week. Strong data here could fuel expectations on when the Bank of Japan will deliver a rate hike, which could come as early as October.

Australian dollar futures are higher, extending its three day rally. A surprisingly high reading on consumer prices caused traders to scale back bets of a another rate cut from the Reserve Bank of Australia. The monthly reading of consumer prices showed an annual increase of 2.8% in July, up from 1.9% in June and far above the median forecast of 2.3%. Part of the jump was due to the timing of electricity rebates, which would unwind in August and likely pull the index down again. However, the trimmed mean measure of core inflation also rose sharply to 2.7%, from 2.1%, and that excluded electricity. Despite the high reading, the measure is only a partial read on inflation, and the Reserve Bank of Australia is likely to wait until Q3 inflation before making any policy changes. Odds of a rate cut in September slipped from 35% to 25% following the data release. The CPI report for the third quarter is due on October 28. Markets price around a 93% chance of a quarter-point cut to 3.35% in November.

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