Markets Turn to Global Growth Trends as the Fed Continues to Dither

Global growth trends are back in focus for the markets as the Fed resists rate cut pressure

• Fed rate cut outlook change marks a widening divergence with markets.
• Traders anticipate a dovish Bank of England (BOE) despite rate cut pause.
• S&P Global PMIs might fuel global recession fears if US data turns soggy.

The Federal Reserve kept its target interest rate unchanged at this week’s meeting of the policy-steering Federal Open Market Committee (FOMC), as widely expected. The central bank revised down its expectations for economic growth while marking higher its outlook for inflation, echoing recent signaling.

On the path of interest rates, the Fed maintained its call for 50 basis points (bps) in rate cuts for 2025. Next year’s median projection was reduced from 3.4% to 3.6%, implying a move from two cuts down to just one. That makes for a widening departure from what the markets have priced in.

Benchmark Fed Funds futures price in 43bps in cuts this year and 58bps in 2026. This puts the markets firmly on the dovish side of the central bank. As much is echoed in the bond market, where priced-in inflation expectations tracked by so-called “breakeven rates” have been falling in recent weeks.

Markets see a dovish Bank of England even with rate cuts on pause

From here, the spotlight moves across the Atlantic as the Bank of England (BOE) delivers a monetary policy announcement of its own. A pause is expected after a rate cut last month. Markets expect the nine-member Monetary Policy Committee (MPC) to vote 7-2 in favor of a hold, inverting May’s tally approving a 25bps reduction.

Earlier this week, UK consumer price index (CPI) data showed that inflation has slowed to 3.4% year-on-year, as expected. This marks a modest downtick from the 15-month high recorded in April. The core rate excluding volatile food and energy prices came down a bit more than analysts predicted to 3.5%, marking a three-month low.

The markets think the bias at the BOE will remain dovish despite the decision to leave policy as-is this month. Benchmark SONIA interest rate futures have priced in 44bps in further cuts this year, with the first move slated to appear by September and the second in December. Another 27bps – that is, one further cut – is on the menu for 2026.

Global recession worries may return if US PMI data disappoints

Early next week, a timely update on global economic growth trends will come from S&P Global with the first look at June’s purchasing managers index (PMI) data. Baseline forecasts point to a familiar picture. Ongoing standstill is expected in Japan, the UK, and the Eurozone. A resilient services sector is seen powering expansion in the US.

Worldwide economic activity growth picked up a bit in May after sliding to the weakest in 17 months in April, according to a roundup of last month’s PMI surveys from S&P Global and JPMorgan. Nevertheless, the trend has unmistakably pointed to ongoing slowdown since growth peaked a year ago.

Analytics from Citigroup warn that US economic data flow has increasingly disappointed relative to baseline forecasts over the past four weeks. The closely watched gross domestic product (GDP) “nowcast” from the Atlanta Fed paints a similar picture: its running estimate of growth in the second quarter has moderated since mid-May.

If this foreshadows disappointment in US PMI figures, worries about global recession may resurface. Traders may reason as much if deceleration in the world’s largest economy resumes without the safety net of growth from other key drivers, most critically the Eurozone and China.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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