Fed doves now see a huge opportunity for the central bank to focus on the slowing jobs market rather than tariff-led inflation risks that have yet to materialise. Fed funds futures currently price around a 95% probability of a 25bp cut and 5% for a 50bp cut. Bets that the Fed would hold off due to inflation risks are now largely off the table. According to Bessent, US rates should be 150–175bp lower.

Diving deeper: Scott Bessent also said that the unique model Trump put in place — forcing a 15% cut from Nvidia and AMD’s Chinese businesses — could serve as a blueprint for other industries. While the approach may make the US government look like a mafia organisation, it would have a major impact in controlling the exploding US debt.

In theory, that could mean lower sovereign bond issuance and, over time, reduced long-term borrowing costs. That would be good for companies and valuations — though it would come with a price tag. Bonds reacted positively with the downside pressure on yields coming primarily from dovish Fed expectations.

The US 2-year yield is now testing its August lows; the 10-year is steady around 4.23% — well below the 4.50–5.00% range that some have framed as the new normal amid structurally higher long-term inflation bets. The US dollar index has fallen for a third straight session, while Bitcoin hit a fresh record.

Today’s US PPI figures could cool overheated dovish Fed bets, as both headline and core readings are expected to tick higher on tariff costs. If that’s the case, some of the more aggressive bets — especially the 50bp camp — could be reversed by week’s end. Delivering a jumbo cut amid inflation uncertainty could risk a repeat of last September’s market backlash. A 25bp move would likely deliver a steadier, more predictable reaction. Also, Bessent believes the Bank of Japan (BoJ) is ‘behind the curve’ in addressing inflation and should hike. The USDJPY dropped to test its 50-day moving average and the Nikkei fell 1%.

In US equities, rising rate-cut expectations pushed the S&P 500 and Nasdaq to fresh all-time highs yesterday. The equal-weight S&P 500 narrowed its gap with the original, tech-heavy version. Nvidia slipped after CoreWeave — a ‘neo-cloud’ provider backed by Nvidia and with Microsoft and OpenAI among its biggest customers — posted a larger-than-expected Q2 loss. But the loss was mainly due to higher spending and acquisitions to expand capacity quickly enough to meet demand. Revenue beat expectations by a wide margin at $1.20 billion versus $1.08 billion forecast. While volatile, CoreWeave’s drop may look attractive to investors betting that today’s losses are investments for tomorrow’s bigger gains.

The rally in small- and mid-cap stocks, which began after the August jobs report, is gaining momentum on dovish Fed expectations. Lower borrowing costs are especially important for smaller firms struggling with higher tariff-driven costs. That could pull money out of tech — which acted as a safe haven amid tariff and rate uncertainty — and into more rate-sensitive corners of the market.

The million-dollar question: could a premature, outsized cut reignite inflation and backfire? I have no answer. The new BLS chief will no doubt find ways to make the data look ‘not too bad.’

If the US tech rally fades, diversification may be prudent. The Stoxx 600 could catch up after its summer stall caused by tariff issues, though upside is likely capped given limited further potential in defence stocks that drove H1 gains.

Japanese equities — especially the tech-heavy Topix — remain a hot pick. Despite Bessent’s critics, the BoJ will likely support the economy against US disruptions. Meanwhile, Chinese equities remain strong on a stable flow of trade headlines. Mainland-listed firms are on track for 5% profit growth in Q2, rising to 13% for overseas-listed peers.

Tencent beat expectations last quarter thanks to AI-driven segments, while Alibaba’s Cloud Intelligence Group posted triple-digit growth in AI-related product revenue, delivering 18% year-on-year growth. The Nasdaq Golden Dragon China index jumped 2% yesterday and is up nearly 30% since its April low, with room for further gains on supportive policy and growing AI demand.