Fed put back on table if tariff drag accelerates: Barclays

Barclays reports that resilient second-quarter earnings, particularly from U.S. Big Tech, have largely supported equity markets despite ongoing macroeconomic uncertainty. However, the bank identifies early evidence of slowing U.S. growth, citing payroll revisions and softer ISM data, which has significantly repriced Fed rate cut expectations, with markets now anticipating 2.4 cuts by year-end and a 95% probability of a September cut. Despite this, Barclays remains cautious about a September cut given low unemployment and potential goods inflation, emphasizing that next week's U.S. CPI report and Fed Chair Powell's Jackson Hole speech will be critical catalysts influencing the rate outlook and market direction.

Analysis

According to Barclays, a divergence is emerging between resilient equity markets, buoyed by strong Q2 earnings from U.S. Big Tech, and weakening macroeconomic indicators. While corporate performance has so far navigated tariff impacts, early signs of slowing U.S. growth, evidenced by payroll revisions and softer ISM data, have prompted a significant market repricing of Federal Reserve policy. Markets are now anticipating 2.4 rate cuts by year-end with a 95% probability of a cut in September. However, Barclays expresses caution, arguing a September cut is not guaranteed due to the low unemployment rate and the potential for rising goods inflation. This sets up critical forthcoming catalysts that could resolve the uncertainty: the upcoming U.S. CPI report, which could either reinforce the market's narrow leadership in quality/growth stocks or cement rate cut expectations, and Fed Chair Powell's Jackson Hole speech. Furthermore, Nvidia's upcoming earnings on August 27 are highlighted as a key event for the prominent artificial intelligence trade.

Key Decisions for Investors

• Investors should closely monitor the upcoming U.S. CPI report and Fed Chair Powell's Jackson Hole speech, as these events are positioned as the primary catalysts to either validate or challenge the market's aggressive rate cut expectations.
• Given Barclays' skepticism about a September rate cut despite heavy market pricing, it may be prudent to hedge against a hawkish surprise that could trigger a reversal in rate-sensitive assets.
• Consider portfolio positioning for two distinct scenarios: a continuation of the narrow, quality and growth-led rally if inflation remains firm, or a broader market lift if a soft CPI print cements expectations for monetary easing, with Nvidia's earnings acting as a key sentiment driver for the tech sector.