A safe-haven bid in foreign exchange markets appears to be fading this morning, with the Japanese yen and Swiss franc losing altitude as downward pressure on risk-sensitive asset classes begins to ease. The dollar’s gains are slowing, Treasury yields are holding steady, and equity futures are setting up for a positive open after a paroxysm of selling saw major indices suffer their biggest losses in more than two years during Wednesday’s session. High-yielding currencies are climbing as carry trade flows hesitantly return, and risk proxies — like the Canadian and Australian dollars — are advancing on a generalised basis.

Yesterday’s second-quarter gross domestic product report showed the US economy accelerating as consumer spending increased, businesses upped investment, and inflation cooled. Output rose at an annualised 2.8 percent pace in the three months ended April, much faster than the 1.4 percent rate recorded in the first quarter, and well above the 2.1 percent consensus forecast. Final sales to private domestic purchasers — a measure used to assess underlying demand — rose 2.6 percent, and the core personal consumption expenditures index fell to 2.9 percent, down from 3.7 percent previously.

Gains are likely to slow. Big jumps in inventory accumulation are typically reversed in succeeding quarters. An 11.6-percent surge in equipment investment looks likely to ease as Boeing-related disruptions are smoothed out. And with cooling labour markets putting downward pressure on disposable income gains, consumers are increasingly funding purchases with credit, suggesting that consumption is unlikely to hold at current levels for long.

Today’s personal income and consumption data will offer more insight into the handoff to the second half of the year. We don’t expect the release to be particularly market-moving, given that the June numbers were included in yesterday’s totals, with the core personal consumption expenditures index printing close to 0.16 percent (0.2 percent rounded) on a month-over-month basis, rising 2.6 percent over last year – the same as in May. Personal income gains probably slowed modestly, exerting drag on real spending levels.

But the numbers remain consistent with an outlook in which the United States becomes an even more dominant force in the world economy. Although the US contribution to global output has stabilised over the last three decades at around 26 percent amid the rise of China and other major emerging market countries, its share of total developed-world gross domestic product has risen sharply. Even if growth slows slightly in the second half, it still looks likely to overshoot the International Monetary Fund’s latest forecasts by the end of this year, generating more than 45 percent of output in the advanced economies – and that likely understates the reality, given the scale of international profit shifting by the big pharmaceutical companies and technology behemoths. One could easily come to another conclusion after seeing the tumult in its political economy, but the US is doing pretty great.

Next week will be a busy one, with a slew of central bank decisions and major data releases keeping traders on their toes.

In the euro area, second-quarter output growth is seen holding at the same pace recorded in the first three months of the year. Data out on Tuesday is expected to show the economy expanding at a 0.3-percent pace, with easing inflation, rising real wages, and improving financial conditions translating into a restrained recovery in consumer spending levels. A top-side surprise could further reduce odds on a rate cut at the European Central Bank’s September meeting, while an unexpected slowdown would clearly result in a stronger impetus for monetary easing, with the euro set to move accordingly.

Markets are assigning coin-toss odds to a rate cut at the Bank of England’s Thursday meeting. We’re not yet convinced of a wholesale shift from centrists on the Monetary Policy Committee — inflation pressures have remained more persistent than expected in recent months, and Chief Economist Huw Pill has delivered a series of hawkish hints — but the economy’s vulnerabilities remain clear, and a move toward more accommodative rate settings has been on the cards for a long time. The pound is exposed to binary event risks around the decision itself, but markets will likely remain convinced of a quarterly cutting cadence ahead either way – so the longer-term exchange rate direction is more likely to be determined by factors outside the Bank’s remit.

Speculation is building around the prospect of a rate hike from the Bank of Japan: odds on a move are holding near the 75-percent mark in overnight index swap markets, and the yen has risen more than 5 percent against the dollar in thin summer trading volumes. The economy does appear to be on a relatively solid footing: worker salaries have been increasing at a solid clip, exports are growing in a consistent manner, and a strong services sector is offsetting persistent weakness in manufacturing. But recent strength in inflation has come primarily from the phase-out of the government’s energy subsidies — which could be reversed in the coming months — and domestic demand remains weak, with consumer spending having fallen for the last four consecutive quarters. If policymakers disappoint markets by leaving rates unchanged and increasing the pace of quantitative tightening instead, it’s not unreasonable to think that carry traders could pile back in and drive the exchange rate back down.

In the United States, Federal Reserve chair Jerome Powell is widely expected to use Wednesday’s press conference to begin setting the stage for a September rate cut. Given yesterday’s data, officials will almost certainly leave policy settings unchanged in the decision itself, but there’s little question that the risks facing the world’s most powerful central bank have moved into better balance, with easing price pressures supporting a shift in focus toward maintaining its full employment objective. We think Powell will keep pulling his rhetorical punches, with continued easing in inflation and jobs markets clearing the way for a more explicit easing signal at the Jackson Hole Economic Symposium in late August – but this could be difficult to pull off, given the clear easing bias that has emerged among his counterparts on the Federal Open Market Committee. The dollar is vulnerable to renewed selling pressure on any hint of a pivot ahead,

Consensus estimates suggest that Friday’s non-farm payrolls report will show another 200,000 jobs were added in July, with the unemployment rate holding at 4.1 percent for a second month. By our reckoning, this would put the three-month average of the unemployment rate 0.46 percentage points above its low in the prior 12 months, just short of the 0.50 percent needed to trigger the Sahm Rule for dating recessions. Claudia Sahm herself has argued that her eponymous indicator may not be useful in measuring the post-pandemic business cycle — given that it’s not really a business cycle — but calls for Fed easing are likely to intensify if the three-month average jobless rate continues its climb. As the saying goes, close only counts in horseshoes, hand grenades, and Fed expectations.