The weekender: Markets in orbit — Gravity of dovish pull reshapes the tape

The dovish pull

A record week on Wall Street ended not with fireworks but with calm. The Nasdaq hit another record, the S&P chalked up its fifth win in six weeks, and even the Dow, which had been knocked back on Friday by sour consumer sentiment, managed to finish the week higher. The real narrative isn’t the headlines — it’s the gravitational pull of lower rates dragging capital back into equities, bonds, and even emerging-market footholds.

Markets are no longer debating if the Fed cuts in September; they’re debating the slope beyond. A quarter-point reduction is baked in, with whispers of a half-point, though that chatter faded by Friday. Every data release added weight to the dovish side of the scale — job revisions that erased past strength, jobless claims at their highest since 2021, and consumer sentiment scraping lows. Inflation, while still alive, no longer has the mass to counterbalance. The Fed’s hand now hovers over the easing lever, and gravity does the rest.

Tech was the sector most visibly pulled upward. The Nasdaq’s 2% surge was powered by insatiable AI appetite and the market’s willingness to pay up when the discount rate looks set to fall. Oracle’s bullish cloud commentary was lighter fluid on that fire, forcing shorts to cover and fueling a scramble into high-beta names. The Mag7 once again bent the tape around their sheer market weight, their rally a perfect expression of liquidity and momentum aligning with Fed gravity.

Bonds echoed the same story in reverse: the long end rallied while the short end inched higher, producing a bull-flattening that marked fast money cashing steepener trades. The uptick in long-term inflation expectations gave the front end a momentary lift, but it wasn’t enough to offset the downward force of rate-cut expectations. The dollar, meanwhile, surrendered ground for the fifth week in six, its weakest close since July.

Gold gleamed in this gravitational field, logging a fourth straight weekly gain to new records, both nominal and inflation-adjusted. Bitcoin bounced back above $116,000, but bullion had the cleaner line. Oil, by contrast, remains capped with geopolitics unable to outweigh swollen inventories.

The IPO market even caught some of the drift. The busiest week since 2021 raised over $4 billion, a marker of revived risk appetite. Deals priced strongly, opened stronger, and left issuers with fatter wallets. But there is also a sense that issuers are taking advantage of market froth.

Next week’s FOMC is less about the cut itself and more about the Fed’s tone. A Powell who nods to inflation while cutting could shift the center of gravity, steepening curves and tightening conditions. Markets want confirmation that the easing cycle has legs. The risk is that the Fed signals a cautious approach, still eyeing the inflation dragon's ascent rather than a smooth downward glide path priced into the curve.

For now, though, the story is clear: lower rates are reordering the universe of returns. Capital is being pulled into equities, bonds, and emerging markets not by hype alone, but by the physics of a shifting policy anchor. The wall of worry still stands — AI payoffs, soft landing doubts, curve dynamics — but gravity works in one direction. The tide is dovish, and everything in its orbit is being drawn higher.

FOMC

Powell’s Fed has been far less about policy shocks (like a surprise rate move) and far more about communication shocks — moments when the words around a decision have blindsided markets even though the decision itself was broadly in line with expectations.

Think of it like this:

• December 2018 – “Autopilot” moment
  The rate hike was expected, but Powell’s casual comment that balance-sheet runoff was on “autopilot” hit like a hammer. Markets had assumed flexibility, and instead got rigidity. Equities cratered into year-end.

• June 2021 – Dot-plot hawkish twist
  No change in rates, but the SEP suddenly pencilled in hikes much sooner than markets anticipated. The dots did the shocking, not the policy.

• September 2022 – Higher-for-longer mantra
  A 75bp hike was priced, but Powell’s press conference killed any hope of an imminent pivot. The message that restrictive policy would persist into 2023 caught traders leaning dovish.

• Jackson Hole 2022 – Eight-minute hammer
  Markets expected nuance; Powell delivered blunt force: “We will keep at it until the job is done.” The brevity and clarity shocked markets into repricing.

So the pattern is clear: Powell tends to set expectations well in advance for the actual decision, but the language — tone, dots, forward guidance — has, on occasion, been the tripwire.

The Dollar on thin ice

FX Traders step onto the high wire next week with the spotlight hot, the crowd hushed, and three forces tugging at the balance pole. On one side, the Fed — a ringmaster who insists the act will continue with another 25bp cut, though whether Powell bows like a dove or struts like a hawk will decide if the rope slackens or snaps. On the other hand, China is the safety net that either stiffens beneath with a firmer retail and industrial beat or sags if activity falters. And beneath it all, the rumble of politics — tremors in Paris, Jakarta, jitters in Bangkok, and a Tokyo stage still unsettled by Ishiba’s abrupt exit.

The dollar, despite its bruises from weak jobs and substantial revisions, still stands. If Powell promotes a dovish stance, G-10 and Asian currencies get a tailwind. If he adopts a hawkish tone, warning of inflation, the tailwind turns into a headwind.

China’s role is just as important. Credit impulses suggest a shake-up, and if retail, IP, and investment perform well, the yuan strengthens and lifts not only all regional currenices but also G-10 under its gravitational pull.

The dollar has spent the last three months skating at the bottom of its range, wobbling but never quite cracking through. Payrolls have rolled over, benchmark revisions stripped nearly a million jobs out of the past year, and short-end yields have collapsed since August — yet the greenback refuses to break. It’s a reminder that currencies are not simply about spot data but about relative gravity, and right now the Fed’s dovish pull is being resisted by other central banks that are reluctant to join in.

The market is already priced for cuts at every remaining Fed meeting this year. Futures point to a glidepath back to neutral, just under 3% by 2026. That repricing has pulled U.S. yields sharply lower, but the bar for another dovish shock has risen. Inflation prints have been benign enough to grease the easing case, but not shocking enough to force a larger 50bp move. Powell would have to put a bigger blade on the ice — not just cut, but hint that half-point moves are back on the table — to crack the dollar lower in the near term. Without that, we’re consolidating near the edge, not breaking through.

Contrast that with Europe. Lagarde made it clear the disinflationary process is “over” and the ECB won’t over-engineer with more cuts. Inflation forecasts were nudged lower but not enough to justify looser policy. The market has largely priced out further ECB easing, with only a token 10bp cut left on the curve for next year. That’s the divergence: a Fed that is cornered into easing aggressively versus an ECB standing pat. If you want the roadmap to EUR/USD at 1.20, that’s it. The euro has been stuck between 1.15 and 1.18, but the gravity of policy divergence will eventually bend that range higher.

Meanwhile, Japan remains the odd man out. The yen continues to underperform, still weighed down by political instability after Ishiba’s resignation. But here, the setup is binary: if the BoJ signals that a rate hike could come as soon as next month, the yen finally has a foothold. If not, the market continues to lean against it, letting USD/JPY drift higher despite the global dollar downtrend. That’s why I’m still running the short USD/JPY idea — the divergence is coming, and when the BoJ finally twitches, the unwind could be violent.

Elsewhere, high beta G10 is enjoying the tailwind of global equities, pushing to fresh highs. AUD/USD in particular has room to catch up: fiscal easing, China stabilization, and a dollar that’s struggling to find fresh legs make for a clean long. I’ve added AUD alongside my core EUR and JPY longs — all are vehicles for the same story, that the dollar’s ice is thinning but the AUD adds some Asia beta spice.

The broader point is simple: the U.S. labour market is slowing, revisions are ugly, and inflation doesn’t have the teeth to stop the Fed from cutting. The ECB and BoJ, by contrast, are holding back. That divergence widens into year-end. The dollar has proven more resilient than the models would suggest, but the surface is cracking. One heavy step from Powell — or one hawkish twitch from Lagarde or Ueda — and the ice gives way.

Stay short the dollar. The structure hasn’t changed. The compass is pointing down, even if the map requires patience.

A deeper dive into the Dollar trade

With Nonfarm Payrolls crawling in at just 22k and prior months revised down by a hefty -285k, the jobs engine is sputtering. The unemployment rate jumped to 4.3%, its highest since 2021. That’s not enough to force the Fed into a 50bp cut this month, but it does raise the odds of some “insurance” easing.

Here’s the kicker: with a three-month average of only 29k jobs, you’d typically expect the jobless rate to be shooting higher. It hasn’t. That tells me the breakeven for payroll growth — the level needed to keep unemployment steady — sits closer to 50k. And that threshold is shifting lower thanks to Trump’s immigration squeeze. Net migration has collapsed from +1.3 million a year in 2022-24 to somewhere between +115k and even negative.

The consequence? The labour force itself is now shrinking on a year-over-year basis — below zero. A structural supply-side shock of this size means trend GDP growth is falling in real time.

The question traders keep asking — if the dollar’s on borrowed time, why isn’t EUR/USD trading above 1.19 and USD/JPY down at 145 already? Strip politics out of the picture, and the answer sits in the forward growth narrative.

Yes, the labour market looks soft in the rear-view mirror. But forward indicators keep pointing higher: consensus 2026 GDP growth is now ~1.7% and still being revised up; financial conditions are loose; PMIs are back in expansion; new orders are humming in the ISM and regional surveys; Beige Book anecdotes are more upbeat; fiscal juice is on its way; and a Fed that’s about to cut simply underwrites that momentum. The Bloomberg Growth Surprise Index — 67 data releases across the economy — has been climbing steadily since late June.

That cocktail of improving forward growth and dovish policy complicates the FX equation. The dollar doesn’t collapse when U.S. growth is being revised higher relative to Europe or Japan. It means the dollar can weaken, but not in a straight line, and not at the speed EUR bulls or JPY longs want. Put differently: spot labour weakness is lagging, but forward growth is leading — and for now, the growth side is acting as ballast to keep the greenback from buckling.

And this is exactly the crux. Payrolls tell you the labour market looked weak over the summer, but NFP is a rear-view mirror indicator. It matters because it can mark the tipping point where layoffs snowball, unemployment broadens out, and consumption buckles. But I don’t think we’re there. The balance of risks leans the other way — that realised U.S. growth runs hotter than trend into 2026, given the mix of easy financial conditions, fiscal tailwinds, and a Fed willing to cut.

Even in the near term, the high-frequency data don’t line up with a collapse. Indeed job postings ticked higher in August, and if you respect payroll seasonals, revisions could easily swing +70k. So the labour data may still surprise to the upside once the dust settles. Time will tell, but the forward growth pulse feels far firmer than the headlines imply.

If realized growth runs above trend in 2026, the implications are unavoidable — inflation. Pumping fiscal and monetary stimulus into an economy that isn’t broken all but guarantees price pressures, especially with supply constraints already in play.

And that’s before we factor in tariffs. The effective rate has been running closer to 11% versus the statutory ~18%. That gap won’t last. Shipping lags, deferred payments, and outright tariff avoidance have delayed the full passthrough, but over time the actual rate converges higher. We’re already seeing the early signals in the data: durable goods prices rose 1.7% in 1H25, flipping from a decline of -0.6% in 1H24. Meanwhile, core services inflation just clocked 0.4% MoM — hardly benign.

So the setup is troubling. Goods prices still have tariff pass-through to catch up with, while services are quietly re-accelerating. That combination is a pressure cooker. Next week’s data will tell us more, but the backdrop is already leaning toward higher inflation risk just as the Fed prepares to ease.

Do the fundamentals even matter right now? That’s the question I keep coming back to as the political squeeze tightens around the Fed. Bessent’s WSJ broadside wasn’t just noise — it was a clear shot across Powell’s bow, accusing the Fed of overreach and blurring fiscal and monetary lines. This White House wants control of the levers, and Trump’s team is laying down a vision that’s as plain as it is aggressive: both monetary and fiscal guns firing at once to stimulate demand, while the supply side gets juiced with tax breaks, deregulation, energy expansion, and a national AI race.

On paper, that cocktail eventually delivers productivity gains that cap inflation. But I don’t buy the sequencing. Capex lands now, productivity later. Which means the economy runs hot first, and inflation comes with it. Yet the market isn’t listening. End-2026 rates are already priced below 3%, with almost even odds of sliding under 2.75% — call it neutral at best. That’s financial repression, plain and simple. And with the Fed under constant political pressure to keep easing, I don’t see that picture changing any time soon.

So the playbook is the same. You buy the real assets that thrive when money is cheap and policy is heavy-handed: equities with the right AI exposure, metals, digital assets, and real yields. I also like Asia real estate. And you stay short the dollar, because at the end of the day, it remains the only true escape valve when the Fed is forced to cut.

Chart of the week: Hybrids take the wheel as EV momentum slows

The great EV revolution isn’t derailed, but it is losing speed. Forecasts for global EV penetration have been marked down — just 25% of sales by 2030 versus 28% previously, and only 52% by 2040 instead of 59%. The gap is being filled not by a return to pure combustion, but by hybrids — the pragmatic middle ground.

For traditional automakers, this shift is less about saving the planet and more about saving margins. Hybrids are cheaper to produce, carry fatter profits than battery-only cars, and meet regulatory targets without demanding an all-in bet on charging networks that still aren’t ready for prime time. In a world where the policy tailwind has eased, hybrids are the hedge that keeps the production line humming and the earnings line intact.

Investors chasing the “pure EV” story may need to rebalance. The money may be in the messy middle — where hybrids extend the life of the ICE cash cow while bridging the gap to an electric future that’s now further down the road.

Margins in North America are poised to fatten as automakers pivot toward hybrids. Yuzawa’s team estimates that U.S. and Asian majors could see operating margins expand by 2–3 percentage points, translating into an additional $15–22 billion in EBIT on top of the ~$52 billion booked in 2024. That’s not just incremental — it’s transformative for balance sheets in a sector often starved of pricing power.

The driver is a peculiarly American twist: engines shrinking, vehicles growing. Consumers want bigger SUVs and trucks, but with acceleration and efficiency to match. Hybrids fit the bill, marrying downsized gasoline engines with electric torque. It’s the rare sweet spot where regulation, consumer taste, and profitability align — and it gives automakers a fatter cushion while the pure-EV future slows in the rearview mirror.