Baker Market Update 2026-07-31

Happy Friday everyone, and happy last day of July! College football season is right around the corner, and hopefully so is some cooler weather! This week we had some economic heavy hitters with an FOMC meeting, GDP and PCE all packed into three days. Throw in the FOMC being more divided than expected, Treasury yields pushing to their highest levels in years (with the 10-year treasury sitting at a 4.71 as I write this), and an oil market still on edge over the ongoing conflict with Iran and you have all the makings of a volatile end to summer.

Wednesday's FOMC meeting was the headline event. The committee ultimately voted 9-3 to hold the Fed Funds Rate steady at 3.50%-3.75%, in what was Chairman Kevin Warsh's second meeting at the helm. The more interesting story was the dissent. Three sitting members, Beth Hammack, Neel Kashkari and Lorie Logan, voted against the hold in favor of a 25-basis point hike. This is a notable pivot from a committee that just a handful of meetings ago was still in easing mode. Keeping with his first meeting in June, Chairman Warsh's post-meeting statement was noticeably shorter than what has become the norm, closing simply with, "The Committee will deliver price stability." Markets did not take the “short and sweet” news well. The Dow fell over 800 points on Wednesday afternoon while the S&P 500 and Nasdaq each slid around 0.6%. Treasury yields moved higher across the curve as well after the meeting, particularly on the long end of the curve.

Thursday brought the advanced estimate for Q2 GDP, and it was a little underwhelming. The economy grew at just a 1.5% annualized pace, well below the 2.0% consensus estimate and a step down from Q1's 2.1% reading. Consumer spending, business investment and exports all contributed positively, but a pullback in government spending and a jump in imports, which subtract from the GDP calculation, weighed on the headline figure. Stocks actually rebounded Thursday morning despite the miss, shrugging off the growth scare as investors focused instead on solid earnings in the stock market, meanwhile Treasury yields continued to climb.

June’s PCE reading gave the Fed a mixed picture on inflation. Both headline PCE came and core PCE, which strips out volatile food and energy, came in line with expectations this month. Headline PCE came in at 3.7% year over year and core PCE rose 3.3% annually. On a monthly basis, core PCE actually undershot estimates by coming in at 0.1% versus the 0.2% consensus, a small silver lining for a Fed that has been fighting stubbornly elevated inflation all year. The flip side is that oil prices have reversed course from June, which saw WTI (West Texas Intermediate) fall from $90 a barrel down to the mid $60s, and now sits at $85 a barrel this morning.

Underneath all of this week's data sits the ongoing conflict between the U.S. and Iran. This conflict continues to keep a floor under oil prices and a lid on any real optimism for near-term rate cuts or stability on prices. With inflation still running hot and geopolitical risk elevated, markets are now pricing in roughly a 65% chance of a 25-basis point hike at the September meeting and a hike priced in by December. This is a sharp reversal from where expectations sat just a few months ago in February when multiple rate cuts were the expected outcome for 2026.

Next week kicks back into gear with ISM Manufacturing on Monday, the JOLTs report on Tuesday, ADP Employment on Wednesday, ISM Services on Thursday and of course another edition of Jobs Friday with the July Non-Farm Payrolls report. Have a great weekend everyone!