Fed Puzzles Markets with Inflation Stance

The recent FOMC press conference left markets puzzled. Chair Kevin Warsh's emphasis on higher real yields and his acknowledgment of market pressure were interpreted as a potential shift in the Fed's stance on inflation, possibly implying that they might not hike rates in September. This view was further supported by the market's reaction to the press conference, with a 14bp steepening in the 2-30 year Treasury curve and US 30-year mortgage rates pushing above 6.70%. However, the decline of two US real yields by 7bp undermined the dollar.

The data for Q2 GDP and core PCE inflation will be crucial in determining the Fed's next move. A strong reading could pressure the Fed to hike rates, while a weak reading might support the notion that they will avoid tightening. The euro, which enjoyed a modest bounce after the press conference, may face further pressure if the data disappoints.

The Bank of England is also expected to keep rates on hold at 3.75%, with a 7-2 vote consensus. Despite this, sterling could weaken as tightening expectations fade later in the year. The Czech Republic and Hungary will release their flash Q2 GDP estimates, which are expected to show stronger sequential momentum.