29.08.25 - Rate-cut optimism vs. economic reality

Yesterday’s economic figures released showed a robust growth for the US economy in Q2, expanding at an annualized rate of 3.3%.
Today on the inflation front, the Core PCE price index, the Federal Reserve’s preferred gauge, ticked up to 2.9% YoY, slightly higher than the prior 2.8% and exactly in line with expectations.
The latest job market figures came in broadly stable, pointing to a still solid labor backdrop, after the recent summer weakness.

Markets: Markets did not react on the figures by the reales. After the opening the picture changes a bit

• Nasdaq down 0.4%

• US 10-year yield higher at 4.24%

• US dollar falling with USD/CHF trading below 0.80

• Gold up 0.6% at USD 3,438/oz

My View: Markets have already priced in a September rate cut. Even Fed Chairman Jerome Powell signaled the possibility of an easing move at the Jackson Hole meeting last Friday. Due to political pressure?
But the Fed is now facing a delicate balancing act. Growth remains strong, inflation shows no meaningful progress toward the 2% target, and Core PCE just moved higher again.

Followers of ETFMandate Market Insights know that I have repeatedly raised doubts: is there truly a fundamental case for easing policy right now?

Adding to this, the US money supply (M2) is already expanding again without any easing measures. Cutting rates into a growing economy with sticky inflation risks fueling new imbalances, from speculative excess in financial markets to renewed upward pressure on prices.

In my view, the market is running ahead of reality, betting on easier monetary conditions rather than acknowledging the data as it stands. For investors, this disconnect between expectations and fundamentals is a clear warning signal.

If the Fed resists both political pressure and market demands, and remains on hold, the current “rate-cut optimism rally”could lose momentum quickly.

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