Good morning Traders and Quants! U.S. equities took a pause Tuesday ahead of today’s Fed decision. The S&P 500 slipped 0.1% after ten straight strong opens, the Nasdaq ended its nine-day winning streak, and the Dow eased as well. Overseas markets were mixed, with Canada, Europe, and Asia mostly softer, though Japan’s Nikkei bucked the trend higher. Bonds rallied modestly on solid demand for a 20-year auction, bringing the 10-year yield down to 4.03%. The dollar hit fresh four-year lows versus the euro, while WTI crude climbed above $64 on the back of more Ukrainian drone strikes on Russian refineries.

The key domestic release was August retail sales, which rose 0.6% versus 0.3% expected, with the control group up 0.7%. Upward revisions to July added to the positive surprise. Despite weak sentiment and softer jobs data, households are still spending for now. Import and export prices also pushed higher, while industrial production managed a 0.1% gain. Taken together, the data paint a picture of consumer resilience but leave the Fed watching tariff pass-through closely.

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Today the spotlight is squarely on the Fed. A 25 bp (0.25%) cut is fully priced, though whispers of a 50 bp (0.5%) cut remain. Futures markets expect two more quarter-point cuts by year-end, but the real test is the dot plot, which is simply the collective outlook of where each policymaker thinks rates should go over the next few years. June’s forecast penciled in only three cuts through 2026, while markets are pricing closer to six by the end of next year. Powell’s press conference will set the tone, with investors hoping he tilts emphasis toward labor softness even as tariffs keep inflation sticky.

Market breadth is improving, new highs are outpacing lows for 18 straight weeks, the longest run since 2021, and 60% of S&P components now trade above their 200-day averages. Yet valuations are stretched. The S&P price-to-peak earnings ratio has reached 27.3, the highest since 2000. Back then, the Fed was hiking. Today it is easing. Whether this backdrop marks the fuel for a new leg higher or the makings of a bubble will depend on Powell’s balance of jobs versus prices.

In geopolitics, Trump begins a state visit to the UK that promises trade deals, diplomatic theater, and protests in equal measure. Meanwhile, Beijing escalated its push for semiconductor self-reliance, banning major tech companies from buying Nvidia’s AI chips. Regulators concluded domestic chips now rival U.S. models allowed under export rules, signaling a hard pivot toward a fully local AI ecosystem. Nvidia’s CEO expressed disappointment but acknowledged the decision is caught in the larger U.S.–China standoff.

In Europe, Brussels is exploring plans to use €170bn of frozen Russian assets as collateral for “reparation loans” to Ukraine. The move would deliver near-term cash support but risks a clash with Moscow and resistance from EU capitals wary of undermining the euro’s reserve status. Markets are watching whether EU leaders can agree on collective guarantees, with implications for sovereign spreads and Ukraine’s financing path.

Fed politics are again on display. An appeals court ruling kept Lisa Cook at the table despite White House efforts to remove her, while Trump adviser Stephen Miran was sworn in as a new governor under unusual circumstances. Analysts expect dissent around today’s cut, Trump appointees may press for more, while regional bank presidents resist further easing. At stake is not only the size of today’s move but also the credibility of Fed independence as Powell nears the end of his term.

Away from the Fed, Trump’s use of troops in domestic settings is drawing scrutiny. National Guard patrols in cities have blurred lines between military and civilian policing, raising legal and institutional questions. The practice plays well with his political base but tests norms around armed forces neutrality. Investors should watch whether this becomes a larger flashpoint as election season heats up, adding another layer of political risk premium.

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Today is decision day. A 25 bp cut is expected, but the dots and Powell’s tone matter most. If labor risk gets top billing, equities likely extend highs while long yields press lower. A hawkish signal on inflation or a fractured Fed risks knocking momentum back. With markets priced for six cuts through next year, the burden of proof is on Powell to either validate or temper expectations.