Q2 Earnings in Focus to Finish the Week

STOCK INDEX FUTURES

Stock index futures are higher with earnings season continuing. Disney’s third-quarter results beat Wall Street estimates on strong parks and streaming demand. McDonald’s stock also rose after the company announced it reversed a sales slump, while Uber announced a revenue beat and a $20 billion stock buyback. As the Thursday deadline for new US tariffs approaches, trade partners are racing to finalize agreements. The Swiss president has traveled to Washington in a bid to prevent a steep 39% tariff on Swiss exports, while President Trump has signaled plans to impose even higher tariffs on India amid rising tensions. The S&P is pacing for earnings growth of 10.3%, up from the 5% expected on June 27.

ISM survey data on Tuesday showed that activity in the US services sector showed only marginal expansion in July, with the ISM Services PMI slipping to 50.1 from 50.8 in June, below the consensus forecast of 51.2. The data reflect a sector under pressure, as employment contracted for the second consecutive month and at a faster pace, while input prices rose more sharply, both of which are concerning signals. Businesses cited ongoing trade policy uncertainty as a persistent headwind, with tariff-related effects remaining the most frequently mentioned issue among survey respondents. A noticeable uptick in commodity prices was also reported. Seasonal and weather-related disruptions further weighed on activity. Despite these challenges, there were signs of resilience: business activity and new orders continued to expand, and backlogs saw a modest increase, suggesting underlying demand remains intact even as firms navigate a complex operating environment. Preliminary second-quarter productivity figures and weekly jobless claims figures are due on Thursday.

The tariff landscape remains volatile, with President Trump signaling further escalation in trade protectionism. He announced plans to impose new tariffs on semiconductors and pharmaceuticals “within the next week or so,” suggesting that import taxes on drugs could eventually reach 250%. Meanwhile, trade relations with China appear to be on a more conciliatory path, with the president noting that negotiations are progressing well and that both sides are considering an extension of the current trade truce, which is set to expire next Tuesday.

The question in the economy now that tariff levels are mostly set, and that tax cuts are on the horizon is how will economic growth and the labor market recover. Tariffs are likely to put increased pressure on prices, while reduced immigration and government job cuts have the dynamic to weigh on demand. Final sales to consumers and businesses, which carves out government spending, inventories, and international trade, grew just 1.2%, the weakest since late 2022, per data on Wednesday. Additionally, a challenge remains in October, when tens of thousands of federal employees who took voluntary buyouts will be off the government’s payrolls and potentially unemployed.

CURRENCY FUTURES

The USD index is lower. The dollar fell on Tuesday after the soft ISM services data, which showed slower growth than expected and increasing price pressures. On Tuesday, President Trump announced that he will decide on a nominee to replace outgoing Federal Reserve Governor Adriana Kugler by the end of the week, while also narrowing the shortlist for Fed Chair Jerome Powell’s potential replacement to four candidates. After Friday’s jobs report and revisions, it is apparent that the labor market is cooling, adding to speculation of additional monetary easing from the Fed past 50 bps.

Euro futures are higher on dollar weakness. German manufacturing orders unexpectedly declined in June, with the hit to international demand pointing to the continued impact of US tariff policy. Factory orders fell 1.0% on the month in June, Germany’s statistics agency said Wednesday, after a 0.8% decline in May. Services PMI data for the eurozone came in just below expectations with a reading of 51.0, below an expected 51.2. Activity in France fell noticeably, with a reading of 48.5 vs. an expected 49.7, signaling that private sector activity contracted further than expected. Meanwhile, services activity picked up in Germany and Spain. Inflation held at 2.0% in July, slightly above the 1.9% forecast, adding to bets that the European Central Bank will hold rates steady for the remainder of the year. Other data due this week will be mostly backward-looking, with German industrial production figures due on Thursday.

British pound futures are higher as markets await the Bank of England meeting and watch for developments out of the US. The bank is expected to cut rates by 25 bps to 4.00%. The BoE remains cautious as inflation is elevated, with CPI inflation being nearly double the bank’s 2% target, but elsewhere there are signs that the UK economy is struggling as the labor market cools. Both services price inflation, which is heavily affected by increased labor costs, and core CPI, which strips out volatile elements – have stayed higher than headline inflation. Purchasing Managers’ Index data for July showed British businesses were raising prices at a “robust pace,” according to S&P Global, which collects the monthly data. Markets will pay close attention to how policymakers vote on its policy decision. While at least five members are expected to back another quarter-point cut, some are expected to vote against a cut of any size, while others are seen voting for a half-point reduction. The three-way split could reinforce expectations that the BoE will stick to its current gradual easing cycle, as it would be the best fit among the decision makers. Any significant changes in how the votes are comprised should draw scrutiny from markets and could signal what the bank will do moving forward. On the data front, the final estimate for services PMI came in at 51.8, above expectations of 51.2, signaling an expansion in activity. The latest RICS house price survey is on Friday.

Japanese yen futures are little changed. Real wages in Japan fell for the sixth straight month in June, with inflation continuing to outpace pay growth, a trend that complicates the Bank of Japan’s path toward further policy tightening. The data cast doubt on the near-term outlook for rate hikes, especially as the BoJ contends with sluggish wage momentum, persistent inflation, and ongoing global trade uncertainty. Minutes of its June policy meeting showed a few Bank of Japan board members said the central bank would consider resuming interest rate increases if trade frictions de-escalate. Markets will closely watch the outcome of the 30-year JGB auction amid lingering concerns over potential additional bond issuance to finance economic stimulus measures by a new government and a sluggish 10-year bond auction earlier in the week.

Australian dollar futures are higher on dollar weakness. There is little Australian economic data out this week and markets are already fully priced for a quarter-point rate cut to 3.60% from the Reserve Bank of Australia when it meets on August 12. Data from ANZ and the employment website Indeed showed the Australian job ads fell 1% in July, suggesting the labor market is easing gradually. Household spending rose modestly in June, although spending on services fell for the first month in three. Australia will maintain the 10% baseline tariff rate. The White House attributed this to progress in ongoing trade and security negotiations, noting that Australia is among a group of countries nearing comprehensive agreements.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve, although the 10-year yield hovered around 4.2%, near a three-month low.

The July ISM Services PMI reading of 50.1, down from 50.8 in June and below expectations of 51.2, signals a stagnation in services sector growth, raising fresh concerns about the underlying momentum of the US economy. Employment contracted for the second consecutive month, and at a faster pace, while the prices index accelerated, suggesting that inflationary pressures remain persistent despite weakening labor market conditions. Businesses continue to cite trade policy uncertainty, particularly tariff-related disruptions, as a major concern, with a noticeable rise in commodity costs adding to input price pressures. Seasonal and weather-related factors also contributed to the subdued performance.

For the Federal Reserve, this mixed data complicates the policy outlook. On one hand, softening employment and tepid activity could justify a more dovish stance, especially if broader economic indicators begin to deteriorate. On the other hand, the uptick in input prices, driven in part by tariffs, may reinforce inflation risks, limiting the Fed’s flexibility to ease. This tension is likely to be reflected in bond market dynamics, where investors may begin to price in greater uncertainty around the Fed’s rate path. Yields could remain volatile as markets weigh the trade-off between slowing growth and sticky inflation, with front-end rates particularly sensitive to evolving Fed guidance.

Weaker labor data will continue to pressure the Fed into lowering rates further; the Fed will have an August labor report in its inventory ahead of its meeting in September. If data from the August jobs report continues to paint a picture of a grim labor market, a 50 bp cut from the Fed would not be off the table. However, many states have reported they have been behind in claims processing in recent months as outdated technology issues, decreased staff, funding issues, and backlogs of appeal delays have potentially impacted survey results. Future jobs reports and revisions will continue to garner attention for those reasons and could add to speculation regarding the integrity and accuracy of the data. President Trump fired a top Labor Department official on Friday, while the departure of Fed Governor Adriana Kugler offered Trump the chance to reshape the Fed.

The $58 billion auction of 3-year Treasury notes was notably weak, reflecting tepid demand and growing investor caution. The fetched a bid-to-cover ratio of 2.53, below the six-auction average of 2.59. Indirect bidders, typically foreign central banks and institutional investors, accounted for just 54.0% of demand, well under the 65.5% average, signaling reduced international appetite. While direct bids rose to 28.1%, surpassing the 19.9% average, dealers were left with an above-average allocation of 17.9%, suggesting a lack of broad-based participation.

On the supply side, the Treasury will auction $42 billion in 10-year notes on Wednesday and $25 billion in 30-year bonds on Thursday.

The spread between the two- and 10-year yields fell to 49.7 bps from 50.9 bps on Tuesday.

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