When Will Stocks Notice Warning Signs Blinking in Bond Markets?

When will the markets start to care about risks to global economic growth?

• Fed Chair Powell sticks to a familiar script in first day of Congressional testimony.
• The markets still see a more dovish path, hinting at lingering global growth fears.
• Soggy US data flow warns recession fears may return, and bonds have noticed.

Federal Reserve Chair Jerome Powell struck a familiar tone in the first day of semi-annual testimony before the U.S. Congress. The central bank chair appeared in the House of Representatives today and is slated for a repeat performance in the Senate tomorrow.

In his prepared remarks, Powell repeated the now-familiar refrain that the Fed is well-positioned to wait and see how the tariff regime rushed out by the White House will impact the path for growth and inflation before acting on interest rates. He added that the base case remains that the duties are likely to lift inflation and hurt economic activity.

In the Q&A session that followed, Powell reiterated that “a significant majority of policymakers think it will be appropriate to reduce rates later this year.” However, he also warned that the reason rates are not coming down now is that consensus forecasts expect a “meaningful increase in inflation this year.”

The markets and the Fed remain at odds after Chair Powell testimony

Last week, the Fed’s policy-steering Federal Open Market Committee (FOMC) kept its interest rate target unchanged, matching widely held expectations. Officials revised down their expectations for economic growth while marking higher the outlook for inflation, as anticipated.

On the path of interest rates, the FOMC kept its call for 50 basis points (bps) in rate cuts in 2025. Next year’s median forecast rate was raised from 3.4% to 3.6%, implying a downgrade from two standard-sized 25bps cuts to just one. This may reflect the idea that President Trump’s twin 90-day pauses of full tariff implementation will delay their impact.

It also marks a widening departure from what the markets have priced in. Benchmark Fed Funds futures are now pricing 54bps in interest rate cuts this year and 61bps in 2026. This means that traders are aligned with the Fed for the immediate term but see a far more dovish trajectory thereafter.

The bond market echoes investors’ thinking. Prevailing inflation expectations baked into Treasury pricing – so-called “breakeven rates” – have trended pointedly lower since mid-May. That suggests the markets are more worried about a disinflationary economic downturn than a sticky price shock from the tariffs.

Will global growth concerns return after the markets cheer US-Iran ceasefire?

For now, markets seem happy to celebrate after the Mr. Trump announced a ceasefire between the US, Israel and Iran. This comes after the US struck Iranian nuclear targets over the weekend, followed mutual efforts to de-escalate. Israel launched a surprise attack on Iran last week.

In the meantime, data from Citigroup warn that US economic data outcomes have increasingly disappointed relative to consensus forecasts over the past month. Purchasing managers index (PMI) data from S&P Global showed this week that the US remains the lone pillar of global growth, while the Eurozone and China idle.

This makes for a single point of failure for worldwide economic growth, along with some preliminary evidence suggesting it is under pressure. That comes at a time when the Fed sounds resistant to act, despite market pressure to the contrary. When asset prices decide to notice the risks therein – as bond markets seemingly have – remains unclear.

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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