Fed at turning point: a new cycle ahead?

Fed at turning point: a new cycle ahead?

US–EU macro data and a potential return to QE are reshaping the outlook for bonds, equities and commodities.

The week closes with a dense set of macroeconomic indicators that offer a very clear picture of the context in which the Federal Reserve is preparing to decide its next move. PMIs, output, prices and — today — US employment data provide a framework that overall opens the door to a rate cut now seen as almost inevitable, along with a possible disguised return to quantitative easing.

The PMI signal: Eurozone improving, US slowing

Yesterday’s composite PMI data pointed in two opposite directions:

• Eurozone: 52.8 vs 52.4 expected → improvement driven by services (53.6 vs 53.1)
• USA: 54.2 vs 54.8 expected → slowdown despite still-strong services (54.1 vs 55.0)

Crossing above the 50 threshold indicates expansion, but the positive surprise in Europe and the negative one in the US feed the idea of a US economy losing momentum at the margin — a condition that pushes the Fed to consider more direct support.

Producer prices and disinflation in the Eurozone

European PPI adds another important piece:

• 0.1% MoM (nearly flat)
• –0.5% YoY (significant disinflation)

With price pressures easing and demand still fragile, the global environment does not push toward further commodity price increases, giving the Fed significant room to adopt a more accommodative stance without fearing a resurgence of imported inflation.

US production: strengths and weaknesses

US production data show a manufacturing sector that is resilient but far from overheating:

• Capacity utilization stuck at 75.9%, well below expectations (77%) → signal of unused capacity and insufficient demand.
• Industrial production +1.6% YoY, in line with expectations but double the previous reading → steady improvement.
• Manufacturing production +1.5%, above expectations (1.3%) and previous data (1%) → manufacturing picking up.

In short: production is advancing, but without pressures that would require a restrictive policy. This gives the Fed further room to ease.

Today’s focus: labor market — the final piece of the Fed’s puzzle

Today’s employment data represent the final key factor: a labor market that remains solid but less overheated would allow the Fed to move comfortably toward a rate cut.

Altogether, these indicators point to a gently slowing economy, free of inflationary pressures and able to sustain easing without creating short-term imbalances.

The Fed prepares: end of QT and a de facto return to QE

On the first day of the month, the Fed injected $13.5 billion in liquidity — the second-largest post-Covid injection. Many analysts interpret this as the technical end of quantitative tightening and the silent start of a new expansionary phase.

According to research by CPR Asset Management, the Fed could reach $80–100 billion in monthly Treasury purchases, equal to roughly half of the financing needs of the US deficit ($1.8 trillion per year).

A return to QE would have profound consequences.

Fixed income: yields falling today, markets on edge ahead of the Fed pivot

Treasuries are seeing a broad decline in yields today, in a climate of caution ahead of US employment data. Investors are increasing duration, supported by:

• weaker-than-expected US PMIs,
• capacity utilization stuck below 80%,
• the Fed’s large liquidity injection, seen as a signal of the end of QT.

Movements are more pronounced in intermediate maturities, while the 10-year hovers below last week’s levels.

Expected effects of the Fed’s decision:

With a rate cut now nearly priced in and a potential QE revival:

• Yields could fall further, with a sharper drop in the 2–5-year part of the curve.
• The curve could begin to steepen, helped by potential Fed purchases of long-dated Treasuries.
• Corporate spreads, especially IG, could tighten thanks to the search for yield and reduced Treasury funding risks.

In short, fixed income markets are already in “pre-pivot” mode, and an expansionary announcement would cement the rally.

Equities: cautious markets today — tech volatile but dominant

Equity markets show contained volatility today, with mixed performance:

• tech swinging after slightly weaker US PMI data,
• Europe more upbeat thanks to stronger PMIs,
• cyclicals lagging, weighed down by low US capacity utilization.

Investors are waiting for employment data before taking directional positions.

Expected effects of the Fed’s decision:

If a rate cut is confirmed along with a de facto balance-sheet expansion:

• Renewed support for tech, where high valuations would be “justified” by lower real rates.
• Continued correlation between crypto and equities, with amplified moves in risk-on phases.
• Limited sector rotation, as cyclicals remain constrained by weak real-demand indicators.
• Households and retail may benefit if labor data show broad-based resilience.

In essence: equities look ready for another tech-led rally if the Fed confirms an accommodative stance, though valuations remain a critical point.

Commodities: gold rising today, oil fluctuating, metals stable

Commodity markets show mixed behavior today:

• Gold rising, supported by falling yields and expectations of a rate cut.
• Oil fluctuating, weighed by signs of still-moderate US industrial demand (capacity utilization at 75.9%).
• Industrial metals stable, supported by improving US manufacturing (+1.5%) but also by trader caution ahead of labor data.

Expected effects of the Fed’s decision:

If the Fed confirms an expansionary stance:

• Gold could accelerate toward new highs, driven by lower real rates and a potentially weaker dollar.
• Oil may receive indirect support from a softer dollar but remain tied to actual demand signals.
• Industrial metals could benefit from increased global liquidity and expectations of a manufacturing upturn in coming quarters.

In short, a de facto return to QE would mainly boost gold and metals, while energy would react more to physical demand than to monetary dynamics alone.

Conclusion

The combination of:

• diverging PMIs,
• sharply moderating European PPI,
• US production rising without pressure,
• high unused capacity,
• the Fed’s large liquidity injection,

creates the ideal backdrop for a monetary shift.

A rate cut now appears little more than a formality.
A return to QE — even if undeclared — could be the real force reshaping global markets in the coming months.