Core inflation in the US posted its strongest gains this year, and the yearly figure accelerated more than expected to 3.1% in July. However, headline inflation eased more than expected to 2.7%. Normally, core inflation is the measure the Federal Reserve (Fed) focuses on when deciding monetary policy. In that context, the market could have reacted by scaling back expectations of a September rate cut.

But no — investors instead increased September cut expectations, thinking that imported goods inflation remained lower than feared as companies continued to absorb tariff costs. As a result, the US 2-year yield fell after the data release, the probability of a September cut jumped to 94% from 80% beforehand, and the US dollar slipped back below its 50-DMA.

The index had already reversed its summer uptrend last week, the game is on for further US dollar weakness. There is still one more set of PCE, jobs, and CPI data before the next decision (even though the new BLS chief is reportedly willing to pause the monthly jobs releases). Still, the odds favour a 25bp Fed cut in September.

The story doesn’t end there. US Treasury Secretary Scott Bessent is now calling for a jumbo rate cut in September — a 50bp move would help offset US jobs weakness caused by trade policies. That sets the stage for further yield curve steepening, driven by rising rate-cut expectations pulling the short end of the curve lower, while exploding US debt keeps the long end from falling by a similar magnitude.

One hope is that Trump’s tariff revenue — and direct collections from companies like Nvidia and AMD on their overseas operations — could fill government coffers, reduce the need for longer-term Treasury issuance, and help contain the long end of the curve. Right now, investors remain more motivated by the prospect of upcoming rate cuts supporting growth than by debt concerns — even if those debt concerns loom large on the horizon.

The S&P 500 advanced to a fresh ATH yesterday, mid-cap stocks rallied more than 2%, and small caps jumped 3%. Bullish sentiment reigns on the back of a softening dollar, robust earnings, rate-cut expectations, and persistent tech appetite.

Speaking of the US dollar, the greenback’s softness continues to support major currencies. The EURUSD extends gains above its own 50-DMA, while cable is testing solid resistance near the 1.35 mark — which also coincides with its 50-DMA and will likely give way to sterling bulls.

Yesterday’s UK jobs data came in significantly stronger than expected, and combined with rising inflation pressures, fuelled expectations that the Bank of England (BoE) will hold off on a November rate cut. That more-dovish Fed/more-hawkish BoE combination should support cable and bring 1.38 back into play in the coming weeks. Elsewhere in FX, the AUDUSD is stronger even after the Reserve Bank of Australia’s (RBA) rate cut yesterday and its signal of more to come.

A softer dollar makes EM investments attractive again, as it reduces borrowing costs and lowers import prices for dollar-denominated raw materials. Cherry on top, lower inflation pressures allow for supportive monetary policies. Brazil’s central bank, for instance, has taken advantage of a stronger real and cheaper imports to cut its Selic rate from 11.75% at the start of the year to around 10% by August without reigniting inflation.

Similar trends are visible in Chile and Indonesia, where currency stability has given policymakers room to ease rates and stimulate growth. No surprise then that the MSCI EM index has outperformed the S&P500 this year, riding the tailwinds of easier monetary conditions and a softer greenback — partly offsetting the drag from US trade policies.

Weaker dollar should also help put a floor under the oil selloff, as it makes oil more affordable globally. OPEC has raised its global demand growth forecast by 100,000 barrels per day to 1.4 mbpd, implying a tighter market than previously projected. It also expects non-OPEC supply to shrink by the same amount due to lower prices.

While I remain cautious on OPEC’s projections — given their vested interest — the US Department of Energy recently increased its forecast for this year’s global oil surplus to 1.7 mbpd, in contrast. Still, I now believe US crude should not sustainably drop below $60pb if the dollar continues to weaken — a positive adjustment from my earlier $50pb downside view.

In the short run, US crude fell yesterday after a surprise 1.5 million-barrel build in US inventories last week. But geopolitical risks remain tilted to the upside: the upcoming Trump–Putin meeting is unlikely to yield any meaningful progress on Ukraine. Any lack of progress should lead to a rebound in oil prices toward and above $65pb.