ORLANDO, Florida, July 31 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Wall Street took a breather on Thursday, but not before

another tech whoosh lifted the S&P 500 and Nasdaq to new highs,

while the dollar and bond yields ended little changed as

investors trimmed positions ahead of Friday's U.S. jobs data.

More on all that below. In my column today I analyze Fed

Chair Jerome Powell's press conference, and the message that

came across loud and clear - as long as the unemployment rate

stays low, it will be very hard to justify rate cuts.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Fed's reticence on rate cuts forces market to

rethink

outlook

2. BOJ turns less gloomy on economy, keeps rate-hike

chance

alive

3. U.S.-China trade war could push ECB to continue

easing:

Mike Dolan

4. Microsoft races past $4 trillion valuation after

solid

results

5. Big Tech may be breaking the bank for AI, but

investors

love it

Today's Key Market Moves

* FX: Dollar gains for sixth day, up 2.5% this week.

Hits

four-month high vs yen above 150.00 yen.

* STOCKS: S&P 500 and Nasdaq hit new highs but end

down

0.4% and flat, respectively. Dow falls 0.7%, Russell 2000 loses

0.9%.

* SHARES/SECTORS: Microsoft shares +5%, Meta +11%,

tech

sector +2%. Apple +3% and Amazon -4% in after-hours trade

following earnings.

* BONDS: Treasury yields end little changed, after

being

lower for much of the day by as much as 5 bps.

* COMMODITIES: Comex copper crashes 22% after Trump

exempts refined copper from 50% tariffs. Premium over LME

copper, around $3,000 earlier this month, virtually disappears.

What stops the tech juggernaut?

It's easy to forget in the midst of the bullish frenzy, but

asset price booms do end, either over time, or more suddenly and

painfully. Predicting the catalyst can be difficult, getting the

timing right is akin to a lottery.

Right now, the rally in U.S. Big Tech looks unstoppable.

Inflation, a hawkish Fed, rising bond yields, tariffs, AI

overspend worries? They've all been thrown at the sector but it

has powered ahead, lifting the S&P 500 and Nasdaq to record high

after record high in recent weeks.

Meta and Microsoft did the heavy lifting on Thursday, with

Microsoft joining Nvidia in the rarified air of the $4 trillion

market cap club. Both Meta and Microsoft's after-hours earnings

reports on Wednesday show their AI bets are paying off.

The global equity picture was much gloomier, however, as

Powell's hawkish signals on Wednesday and U.S. inflation data on

Thursday pushed most major indices into the red.

On the macro front, annual U.S. core PCE inflation was 2.8%

and the Dallas Fed's trimmed mean PCE rate shot up to 3.4%, the

highest since February last year.

There are signs the tariff effect on goods prices is kicking

in. Ernie Tedeschi at the Budget Lab at Yale posted on X that

PCE durable goods prices are up 1.7% this year. Excluding the

pandemic, that's the biggest six-month rise since 1987.

On tariffs, U.S. President Donald Trump on Thursday gave

Mexico a 90-day reprieve to negotiate a broader trade deal, but

is later expected to slap new levies on countries that have not

struck trade deals by his 12:01 a.m. EDT (0401 GMT) deadline.

As economist Phil Suttle points out, the so-called 'BRICS'

countries have stood up to Trump more than developed economies,

who have "generally preferred to sue for peace." But they're

paying a price - as things stand, China and Brazil are facing

tariffs of up to 50%; South Africa 30%; and India 25%.

"This is a case of a world turned upside down, and not one

that improves the global outlook," Suttle says.

The focus now turns to July's U.S. employment data on

Friday. Solid job growth and, more importantly, a low

unemployment rate could snuff out all bets on a September rate

cut. Right now, market pricing shows a September cut is

basically a coin toss.

Have we seen Powell's last rate cut as Fed chair?

Federal Reserve Chair Jerome Powell made it clear on

Wednesday that the resilient U.S. labor market is currently the

primary determinant of monetary policy, a signal that strong

July employment figures could snuff out all bets for a September

rate cut and reduce the likelihood of any further easing this

year.

At his press conference following the Federal Open Market

Committee's meeting on Wednesday, Powell insisted that the

rate-setting body's next move will depend on the "totality" of

incoming economic data. He acknowledged the case for easing,

like the softening in consumer spending, GDP growth of only 1.2%

in the first half of the year, and downside risks to the job

market from weakening labor demand and supply.

But he signaled why the Fed is maintaining its mildly

restrictive stance: "The main number you have to look at right

now is the unemployment rate," Powell told reporters.

This firm position is particularly notable given that

Governors Christopher Waller and Michelle Bowman voted to ease,

the first time in over 30 years that there have been two

dissenters at a Fed policy meeting.

But Powell has a point. The labor market is still broadly in

balance, thanks to tighter immigration controls capping the

inflow of foreigners into the workforce. Other indicators like

job quits and openings rates are holding up well too. Plus, an

unemployment rate of only 4.1% is hardly justification for a

rate cut.

The initial market reaction - a retreat on Wall Street, rise

in bond yields, surge in the dollar and further cooling of rate

cut bets in money markets - suggests investors heard Powell's

message loud and clear.

Rates futures markets now indicate that the probability of a

quarter-point cut in September is essentially a coin toss, the

least dovish pricing in over a year. Only one rate cut by the

end of this year is fully priced.

Steven Englander, head of global G10 FX research at Standard

Chartered, says it's difficult to argue with the market's

interpretation based on Powell's tone.

"Powell is pretty clear that he's tying himself to the

unemployment rate," Englander notes.

PRECARIOUS FULL EMPLOYMENT

The labor market's resilience shows why financial markets

have once again overestimated the Fed's appetite for easing.

The unemployment rate has been anchored at 4.0-4.2% for over

a year. That's historically low, and as Powell says, essentially

shows the economy is running at full employment. As long as that

remains the case it will be difficult to justify cutting rates,

even if that balance is increasingly precarious due to the "dual

slowing" of labor supply and demand, as RBC's Mike Reid puts it.

And we mustn't ignore inflation, which also arguably

warrants Powell's "modestly" restrictive policy stance. Annual

inflation is running "somewhat" above the Fed's 2% target,

according to Powell, with core CPI at 2.9% and core PCE at 2.8%.

And with the pass through from tariffs yet to be fully felt,

the risks to prices are skewed to the upside. Powell reckons

that tariffs should represent a one-off price rise only, but he

admits no one can be sure. If the nascent tariff-fueled creep in

goods prices persists, the Fed may feel it has to wait to ease

policy until the impact subsides. And that probably won't be

until next year.

At the height of the post-Liberation Day turmoil in early

April, traders were pricing in more than 130 basis points of

easing this year. And just one month ago, they were expecting

around 70 bps of cuts by year end, but that's now down to around

35 bps.

Looking further out, only 65 bps of easing is priced into

the futures curve by May of next year when Powell's term as Fed

Chair ends. Could Powell have presided over his last rate cut as

Fed Chair? That's unlikely, but certainly not impossible.

What could move markets tomorrow?

* Australia retail sales (July)

* Japan manufacturing PMI (July)

* China unofficial manufacturing PMI (July)

* UK manufacturing PMI (July)

* Euro zone HICP inflation (July, flash estimate)

* U.S. non-farm payrolls (July)

* U.S. ISM, S&P Global manufacturing PMIs (July)

* U.S. University of Michigan consumer sentiment, inflation

expectations (July, final)

* U.S. earnings including Exxon and Chevron

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