Calm into US growth, inflation data

Risk sentiment was limited across European and US indices yesterday, as investors likely decided to take profits on the latest rally and step aside before fresh data hits. Federal Reserve (Fed) member Mary Daly said she would support further policy easing but stressed the need to proceed cautiously to avoid oversteering. Her comments came a day after Jerome Powell refrained from committing to further rate cuts, citing lingering inflation risks. He also noted that asset valuations look high—but, of course, that’s not the Fed’s mandate. Lowering rates while raising growth forecasts certainly helps, Jerome! Either way, Fed commentary this week is unlikely to provide broad market support.

AI and sector-related news remains supportive: Nvidia said it will invest up to $100 bn in OpenAI, while OpenAI plans roughly $400 bn to develop five new US data centers—signaling continued capital rotation toward those in this exclusive tech club. Yet, investors appear hesitant to buy more this week.

Micron, for example, posted a blowout quarter, with revenues and profits smashing expectations thanks to insatiable AI demand and soaring cloud memory margins. Yet the stock fell nearly 3% as investors cashed in after its stellar run. Guidance was bullish—pointing to even stronger sales and profits ahead, with HBM capacity sold out into 2026—but remained insufficient to bring more investors in, leading investors to question whether - after a 170% rally since April - Micron’s story is already priced in, or is this just a pause before the next leg higher? Time will tell.

On the other side of the world, investors aren’t yet ready to take profits, as more gains may be available. Alibaba jumped over 9% yesterday and is again up this morning, testing highs not seen since 2021. Some may cry “bubble,” but the company trades at a PE of ~26 versus Amazon’s ~33, so it’s still cheaper, though the gap is narrowing. There may still be room for Chinese tech stocks to run further—supported by domestic funds—but valuations will soon come under scrutiny.

Today, all eyes are on the latest US GDP update, a key pulse check for investors. US growth is expected to have rebounded to 3.3% in Q2—following a sharp disruption from the trade war in Q1—supporting the “soft landing” narrative. But a soft landing is a double-edged sword: a stronger-than-expected print could reignite concerns that the Fed may refrain from cutting rates further, especially next year when Fed members hold divergent views. That scenario would push bond yields higher, strengthen the US dollar and weigh on equities. Conversely, a softer GDP read would likely bolster bets on further Fed easing, sending yields lower, lifting stocks and softening the dollar. Combined with tomorrow’s PCE data, today’s GDP print could set the tone across bonds, stocks and currencies after weeks of dovish shifts in Fed expectations.

In FX, the US dollar rebounded yesterday, limiting gains in majors like EURUSD and Cable near key psychological levels. The EURUSD faced solid offers above 1.18, while Cable failed to defend 1.35. As I noted last week after the Fed decision, a minor USD upside correction is possible as dovish expectations adjust. Data showing resilient growth, jobs or higher prices should support USD recovery, even though the medium/long-term outlook remains negative due to waning appetite for US debt and rising doubts about the dollar’s global reserve status— due to US withdrawal from trade and military commitments.

But hey, it’s not just US debt that’s unloved: British gilts remain out of favour as well. This week’s UK Treasury auctions highlighted growing investor unease: demand for the 30-year bond was the weakest since 2022, while the 5-year sale had the thinnest cushion in nearly two years. Tepid appetite underscores how rising budget concerns are weighing on long-term debt and, in turn, UK growth prospects, at a time when inflation pressures keep the Bank of England’s (BoE) hands tied. Sterling looks unappealing ahead of the Autumn Budget.

Here in Switzerland, the Swiss National Bank (SNB) will likely maintain its policy rate at 0%. Returning to negative rates could be a step too far given the current economic backdrop and franc’s stability. However, the franc is stable near its all-time strongest levels against both the US dollar and the euro, suggesting that while the SNB is expected to hold above zero through 2026, direct FX interventions could become increasingly likely if demand for the franc spikes again.