Fed Expected to Stay on Hold in Coming Months, Rate Cut Possible in 2027 — Market Talk

0903 ET - The Federal Reserve is expected to stay on hold in the coming meetings, Amundi Investment Institute says in its midyear outlook. "With the monetary policy stance now broadly back to neutral, we think it is most likely that the Federal Reserve will stay on hold in coming meetings," it says. The risk of rate hikes would, however, increase if higher energy costs feed into broader prices and economic growth accelerates, Amundi says. "We expect a resumption of the disinflationary trend in 2027 to allow the Fed to cut rates next year," it says. (emese.bartha@wsj.com)

0858 ET - The change of chair at the Federal Reserve might usher in a new phase for the world's largest central bank, Amundi Investment Institute says in its midyear outlook. "Under Chairman Kevin Warsh, the Fed may consider reforms that could not only change the way monetary policy is conducted, but also how the Central Bank interacts with the Treasury," it says. This comes at a delicate moment, with the Fed having to defend its independence while navigating a complex inflation, growth and fiscal backdrop, Amundi says. The most immediate challenge is where to set interest rates in light of the Fed's dual inflation and employment mandate, the asset manager says. "The cycle is harder to read than in the past." (emese.bartha@wsj.com)

0846 ET - Seasonality factors suggest a small window for the 10-year Italian BTP-German Bund yield spread to widen in July followed by a tightening, Morgan Stanley rates strategists say in a note. "Our framework points to a short widening in 10-year BTP-Bund [yield spread] at the start of the month (the median is approximately 4 basis points) followed by a tightening phase lasting into mid-September, with a median move of around approximately 8bp," they say. The 10-year BTP-Bund yield spread is currently 78 basis points, according to Tradeweb. (emese.bartha@wsj.com)

0843 ET - Sterling and U.K. government bonds have welcomed remarks about the need for sound finances by Andy Burnham, who is expected to succeed U.K. Prime Minister Keir Starmer, ING's Chris Turner says. However, Burnham is yet to set out details on his plans to alter spending commitments and how those changes will be paid for, he says. "That could create headwinds for U.K. asset markets later this year." Sterling rises 0.3% to a near one-week high of $1.3240, according to LSEG. The euro falls 0.1% to an intraday low of 0.8612 pounds. The 10-year gilt yield is lower, last trading at 4.731%, Tradeweb data show. (renae.dyer@wsj.com)

0840 ET - Demand for U.S. government debt weakens and Treasury yields rise, as U.S. and Iran agree to halt fighting while negotiating a deal to fully restore shipping through the Strait of Hormuz. Oil prices edge higher but remain around pre-war levels. Economists surveyed by WSJ expect June job creation to slow to 118,000 from May's 172,000. Payrolls are due Thursday as the week is shortened by Friday's Independence Day holiday. The WSJ Dollar Index falls slightly. The 10-year Treasury yield is at 4.390%, up from 4.372% Friday. The two-year rises to 4.119% from 4.087%. (paulo.trevisani@wsj.com; @ptrevisani)

0826 ET - U.K. government bonds, or gilts, are likely to experience improved performance due to easing inflation concerns as energy prices drop, eToro's Lale Akoner says. Oil prices have dropped significantly since the U.S.-Iran peace deal reached in mid-June. As a result, investors have lowered their expectations of the Bank of England raising interest rates in the coming months and currently price in an 84% probability of a BOE rate hike in December, while they fully priced in a one-quarter-point BOE rate rise prior to the Middle East peace deal, LSEG data show. (miriam.mukuru@wsj.com)

0801 ET - Improving economic performance in U.K. regions outside of London, such as Manchester, faces multiple hurdles to ensure lasting and broad-based growth, Alexander Harvey at Oxford Economics says in a note. Many urban cores remain too weak and too poorly connected to spread growth across entire regions, Harvey says. While Manchester has achieved exceptional economic growth in recent years, this hasn't translated to higher incomes and economic activity in the region's outer boroughs, he notes. "Policymakers must continue to develop critical mass in the center of cities like Manchester and invest in transport connectivity in the outer regions to deepen labor markets, unlock stronger output growth, and enable benefits to meaningfully spread across the entire city-region," Harvey says. (don.forbes@wsj.com)

0731 ET - Sterling rises slightly after Andy Burnham, the frontrunner to succeed Prime Minister Keir Starmer, vowed to boost growth across the U.K while reaffirming his commitment to meeting the fiscal rules. Burnham said his plans to improve growth and raise living standards will be backed by "sound" public finances. Burnham is widely expected to become prime minister after Starmer announced his resignation last week. Sterling rises 0.2% to an intraday high of $1.3230 after the speech from $1.3209 beforehand. The euro falls 0.1% to 0.8618 pounds from 0.8629 pounds. (renae.dyer@wsj.com)

0713 ET - Yields on U.K. government bonds, or gilts, decline as Burnham delivers his first speech since announcing his candidacy for the prime minister role. Burnham vows to drive economic growth in every part of the U.K. and reduce the welfare bill in a "fair and lasting" manner. The announcement calmed concerns about high public spending in the U.K. Ten-year gilt yields fall 0.7 basis points to last trade at 4.726%, Tradeweb data show. (miriam.mukuru@wsj.com)

0646 ET - The euro is relatively firm ahead of a busy week that could reshape expectations for monetary policy in both the euro area and the United States, DHF Capital S.A's Bas Kooijman says in a note. Attention is centered on the European Central Bank's forum in Sintra, Portugal, where policymakers could provide further insight into the outlook for inflation and interest rates, the CEO and asset manager says. "Market participants will closely follow remarks from ECB President Christine Lagarde and other members, whose comments could influence bond and currency markets," he says. Another potential driver for the euro this week is Wednesday's flash estimate June inflation report. The euro rises 0.2% to $1.1402. (emese.bartha@wsj.com)

0626 ET - The dollar could weaken by year-end as the Federal Reserve probably won't raise interest rates as markets anticipate, MUFG Bank analysts say in a note. New Fed Chairman Kevin Warsh's tough rhetoric on inflation fueled bets the Fed could lift rates. However, the Fed is likely to keep rates on hold, the analysts say. "U.S. inflation appears close to peaking and should moderate through the remainder of the year thereby easing pressure on the Fed to respond forcefully." Disinflationary pressures should build on lower energy prices and the fading effects of last year's tariff increases, they say. The potential for improved growth outside the U.S. should also weigh on the dollar, they say. (renae.dyer@wsj.com)

0556 ET - China's economy and the more traditional sectors in the equities market may face further pressure before conditions get better, Julius Baer analyst Richard Tang says. Investors appear to have low expectations for any stimulus measures from Beijing aimed at reviving domestic demand, as policymakers are focused on boosting artificial-intelligence development and strengthening economic security instead, he says. Tang expects the divergence between the real economy and the stock market to persist. AI infrastructure trades will maintain their outperformance in 2H while non-AI firms, including legacy internet companies, will likely see continuing weakness. "We believe the earliest timing for old technology [stocks] to catch up in performance will likely be 4Q," he adds. (jason.chau@wsj.com)