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Investors pushed stocks to new heights as falling bond yields signal optimism about potential Federal Reserve rate cuts. Referencing the last two CPI releases and a notably tame read on PCE price growth late last week, Jerome Powell's comments about the US returning to a disinflationary path fueled this rally.

In a historic moment, the S&P 500 closed above 5,500 for the first time, continuing a scorching 2024 rally that's left analysts racing to update their targets. This marks the index's 32nd record high of the year. Tesla Inc. (TSLA) led the charge among megacaps, soaring 10%, while Nvidia Corp. (NVDA) didn't quite catch the wave. Meanwhile, the Nasdaq 100 also set a new record, hitting the 20,000 mark.

While Powell didn’t give a definitive nod to rate cuts, his acknowledgment of progress on the disinflation front was music to investors' ears. There are enough signals in the US economic data suggesting that a September rate cut, possibly another in Q4, is on the table. This anticipation builds ahead of the crucial US payrolls report due Friday, with economists forecasting 195,000 new jobs in June and an unemployment rate steady at 4%. Investors hope for a "Goldilocks" print on Friday: not too hot or cold.

In the Forex markets, while Powell spoke volumes on Tuesday, nothing he said seemed significant enough to change traders' outlooks drastically. As a result, the US dollar eased back slightly, but movements remained muted, well within the low-volatility daily ranges.

Like the Fed, Forex traders—especially those with short dollar positions—are cautious. They've been burned multiple times this year and want to be sure inflation is genuinely under control before committing to a short US dollar stance, especially with the wave of Trump election trades sweeping the markets. Bond traders are bracing for the inflationary consequences of policies like immigration control and tariffs while conveniently ignoring some lacklustre US data.

The US yield curve bear-steepened following the debate and continued on Monday, reflecting the perception that Trump's chances of a November victory have significantly improved. Monday’s Supreme Court ruling on Trump's potential immunity regarding acts surrounding the 2020 election results was viewed as a net positive for his election prospects.

The political risk premium pricing itself into bonds, especially with the Le Pen/Trump dynamic, suggests that the markets are wary. A victory for the political fringe in France would be the Euro’s worst nightmare, increasing public spending and eroding fiscal stability. On the other side of the pond, the dollar could remain strong through summer and into fall, buoyed by the "Tariff Man" premium. US Treasuries reflect higher odds of a Trump win and the inflationary effects of proposed tariffs.

When it comes to pricing in political risk, I often find it challenging to grasp the implications of a worst-case scenario fully. I view political risk through a short-term lens, but should we be worried now? Perhaps, as significant changes unfold before our very eyes.

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