Reprinted with the kind permission of the Global CIO Office
FOMC minutes show still hesitancy to cut rates. Indonesia and New Zealand with bold rate cuts
Overnight Market Movers
Global markets traded cautiously ahead of Powell’s upcoming Jackson Hole address. US equities were steady, with the S&P 500 little changed as investors weighed earnings strength against policy uncertainty. European stocks softened slightly, while Asian indices traded mixed on renewed concerns over trade and growth. In bonds, US 10-year Treasury yields edged higher as traders pared back the likelihood of aggressive Fed easing. The dollar held firm against major peers, while oil prices slipped on weaker demand signals and gold found support as investors sought hedges against policy ambiguity.
Emerging Market – Surprising Easing Accelerates
Central banks in Asia are stepping up their support for growth. Indonesia surprised markets with another rate cut, lowering its benchmark by 25bps to 5% while simultaneously upgrading its growth outlook for 2025. The move reflects confidence in domestic stability but also acknowledges the drag from softer demand and weaker trade. In parallel, New Zealand reduced its policy rate by 25bps to a three-year low and signalled further easing ahead, as a sluggish economy and policy uncertainty weigh on sentiment. Both decisions underscore a trend of smaller economies leaning into monetary stimulus even as global inflation risks remain alive.
Jackson Hole Focus: Fed in the Crosshairs
Attention now shifts firmly to the Federal Reserve, with Powell’s Jackson Hole address looming large. Minutes from the Fed’s July meeting highlighted concern that tariff-driven price pressures could derail progress on inflation, explaining why officials chose caution despite political pressure for cuts. Markets, however, remain convinced that a September easing is almost inevitable, with futures pricing a quarter-point move. The dollar has steadied near recent highs, while Asian equities have traded without clear conviction as investors await a firmer steer from the Fed.
In the context of the Fed’s commentary I found this quote from JPMorgan particularly helpful – “While the Committee had emphasized keeping longer-run inflation expectations anchored in prior minutes, adding “especially important” gives a hawkish tone to the latest incarnation that harkens back to Powell’s prior comments that price stability is a necessary condition to ensure achievement of the maximum employment objective.” To us despite the political noise it seems that the Fed still has a hawkish bias.
The dollar hardened and equity markets slipped.
Chart 1: DXY- Dollar spot rallies on Fed Minutes
And the market still anticipates ongoing rate cuts, however the rate cut in the meeting after next is seen as 50/50.
Tilt Toward Fiscal Dominance
A growing market narrative is the risk of fiscal dominance, where the sheer scale of government borrowing begins to dictate central bank choices. Investors are increasingly wary that high issuance in the U.S., Europe and Japan may limit the scope for restrictive monetary policy, forcing balance sheet support back onto the agenda. The worry is less about imminent crisis and more about credibility: can central banks maintain independence when fiscal needs loom so large? This unease has quietly supported demand for gold and other hedges against monetary slippage. It also plays to a narrative of EM outperforming developed markets.
Closing Insight
The divergence is becoming clearer: emerging markets are pressing ahead with easing, while developed markets wrestle with the politics of inflation and debt. This split may well define asset performance in the months ahead. If fiscal dominance proves more than a passing worry, it points towards structurally higher inflation premia and a market that increasingly rewards hard assets and defensive equities over long-duration bonds. For now, Powell’s remarks at Jackson Hole could prove decisive in confirming whether this new regime is crystallising, or whether the Fed still has the ability to anchor the narrative.
