Analyzing the U.S. Economic Landscape: Short-Term Cooling, Long-Term Resilience

Looking ahead, we expect both the U.S. job market and inflation to cool down in the short term. However, in the long run, the U.S. economy remains robust, and there's still a risk of "secondary inflation."

Firstly, the U.S. reported a solid second-quarter GDP growth rate of 2.8%, a significant jump from the 1.4% in the first quarter, signaling strong economic demand. Secondly, regardless of whether Trump or Harris wins the upcoming presidential election, fiscal policies are likely to remain loose. Current polls show Trump leading, which could mean more aggressive fiscal easing. Therefore, we still believe there will be a rate cut in September, but only one this year, with limited room for more cuts in 2025.

On July 31, the Federal Reserve kept the federal funds rate at 5.25%-5.50%, matching market expectations.

On July 31, the Federal Reserve held its policy meeting and kept the federal funds rate in the 5.25%-5.50% range, as expected. The meeting's statement showed some changes from June regarding the labor market and inflation.

Firstly, the statement noted that "recent job growth has slowed, and the unemployment rate has risen but remains low," compared to the previous meeting where "job growth remains robust, and the unemployment rate is low."

Secondly, the statement mentioned that "the Committee has made some progress towards its 2% inflation target in recent months," removing the word "modest" used in June.

Thirdly, the statement emphasized that "the Committee remains attentive to risks on both sides of its dual mandate," showing a greater focus on balancing inflation and the labor market.

During the post-meeting Q&A, Fed Chair Powell mentioned, "If inflation continues to decline as expected and the labor market remains stable, we might see rate action in September," highlighting a dovish stance.

Following the Fed's announcement, market sentiment turned optimistic, and the likelihood of a September rate cut increased. According to CME FED, expectations for a September rate cut rose to 71% on August 1, with three cuts anticipated this year. This is up from June 13, when the market expected a 60% chance of a September rate cut and two cuts this year.

In financial markets, as of July 31, all three major U.S. stock indices rose, with the Nasdaq leading at a 2.64% gain. Yields on 10-year and 2-year U.S. Treasury bonds both fell by around 10 basis points. The commodity market saw significant rebounds, with WTI crude oil futures up 5.19%, Brent crude oil futures up 4.47%, and COMEX copper futures up 2.73%.

The Fed's recent statements were neutral to dovish, emphasizing its focus on balancing inflation and the labor market while remaining politically neutral. Recent employment data shows that the U.S. unemployment rate has been rising from April to June, with June's rate at 4.1%, lower than expected. June's non-farm payroll additions were 206,000, slightly above expectations, but mainly driven by the government sector, which accounted for about one-third of new jobs. This indicates slow growth in the private sector. Additionally, July's ADP employment change was 122,000, below the expected 150,000.

Given Powell's earlier statement that "rate cuts don't have to wait until inflation drops to 2%," if the inflation and employment data for July and August align closely with the Fed's targets, a rate cut in September seems very likely.

For investors, this scenario suggests potential opportunities in sectors that benefit from lower interest rates, such as technology and consumer discretionary stocks. Additionally, commodities like oil and copper, which have already shown strong rebounds, may continue to perform well. On the fixed income side, Treasuries could see further yield declines, making them attractive for bond investors. Keep an eye on the upcoming inflation and employment data, as they will be critical indicators for the Fed's next move.