U.S. wage growth in the second quarter fell to its slowest pace in three-and-a-half years, providing further justification for a September interest rate cut

US labour costs rose modestly in the second quarter and private sector wages grew at their slowest pace in three-and-a-half years, providing further evidence that inflation is on a steady downward trend and adding to the case for a rate cut in September.The Labor Department report on Wednesday follows last week's data showing a sharp drop in inflation last quarter, all measures below 3 percent, and labor costs are likely to cool further as the labor market continues to slow.

The slight increase in labour costs is likely to be welcomed by Federal Reserve officials, who end a two-day policy meeting on Wednesday. The central bank is expected to maintain its target range for the benchmark overnight rate at 5.25-5.50 per cent, where it has been since July.

"Private sector wage increases are more in line with what Federal Reserve officials want,"foreign exchange trading platformThe chief economist said. "The economy is gradually returning to normal. The slowdown in wage growth gives the green light for the Federal Reserve to cut interest rates."

The Bureau of Labor Statistics said the Employment Cost Index (ECI) rose 0.9 percent in the second quarter, confirming a 1.2 percent increase in Quarter 1, the broadest measure of labor costs.

Economists surveyed had previously forecast a 1.0% rise in ECI. Labor costs rose 4.1% year-on-year in June, the smallest increase since the fourth quarter of 2021, and 4.2% year-on-year in March. The annual increase in labor costs has slowed from 4.5% in June 2023.

Policymakers see the ECI as one of the better indicators of slack in the labour market and a predictor of core inflation, which the Fed targets at 2 per cent, because it is adjusted for changes in the composition of the labour force and the quality of employment.

Sarah House, a senior economist at Wells Fargo, said: "Today's data marks an important step in the direction of the Federal Reserve becoming'more confident 'that inflation has cooled enough to begin lowering the federal funds rate."

The ADP jobs report released on Wednesday also confirmed the slowdown in wage growth, with the report showing that wages for employed workers rose 4.8% year-on-year in July, the smallest increase in three years.

There was also some encouraging news coming out of the troubled real estate market. A report from the National Association of Realtors (NAR) showed that pending home sales rebounded 4.8% in June and fell 1.9% in May due to improved supply. However, this does not mean an inflection point in the market, as affordability remains a challenge. June pending home sales fell 2.6% year-over-year.

"Higher mortgage rates and high home prices will be a drag on home buyers in the short term," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "But as the Federal Reserve begins to cut interest rates, rising inventories and lower borrowing costs should have a positive impact on home sales for some time."

(One-hour chart of the US dollar index)

The dollar has fallen, and the Federal Reserve has signaled that it may cut interest rates in September

The dollar's decline deepened on Wednesday after the Federal Reserve left interest rates unchanged but left the door open to lowering borrowing costs as soon as its next meeting in September.

"The Fed wants to let the data play out for a while longer, even at the risk of falling behind the curve," said ForexLive's chief monetary analyst in Toronto.

Traders have fully priced in the September rate cut, which could ease pressure on the Federal Reserve to signal some kind of action by then.

"Everyone in the market knows it's been digested, and the Federal Reserve knows it's been digested, so not fighting back is an acquiescence to market pricing," Button said.

Traders also expect the Federal Reserve to cut interest rates for the second and possibly third time before the end of the year.

The dollar index fell as much as 103.92, falling 0.4% to 104.05 in late trading, after falling 1.7% in July.

The next important US economic data likely to drive Fed policy will be the July government jobs report on Friday, which is expected to show employers added 175,000 jobs in the month, according to a median estimate from economists polled by Reuters.

UN Secretary-General: Attacks in Beirut's southern suburbs and Tehran represent a dangerous escalation

On July 31 local time, UN Secretary-General António Guterres issued a statement through his spokesperson, in which he said that the recent attacks in the southern suburbs of Beirut, Lebanon, and Tehran, Iran, were a dangerous escalation.

Instead, the statement said, all parties should now work towards a cease-fire in Gaza, the release of all detainees, increased humanitarian aid to Palestinians in Gaza, and the restoration of peace on both sides of Lebanon's temporary border with Israel, also known as the "Blue Line." Instead, all that can be seen is incidents that undermine the achievement of these goals.

The spokesperson said that the UN Secretary-General has always called on all parties to exercise maximum restraint, but at this extremely sensitive moment, restraint alone is not enough. The UN Secretary-General urges all parties to actively work to ease the situation in the region for the sake of comprehensive long-term peace and stability.

The statement said that the international community must work together and take urgent measures to prevent any incident that could push the Middle East to the brink of crisis and have a devastating impact on civilians. To achieve this goal, comprehensive diplomatic action must be promoted to promote de-escalation in the region.

The United States and Europe urgently mediate to prevent a full-scale war in the Middle East

Fears of a wider regional conflict have soared as Iran and Hezbollah have vowed to retaliate for the Israeli attacks on Hezbollah and Hamas leaders in Beirut and Iran, according to the Financial Times.

US and European Union diplomats are engaged in urgent discussions over the Middle East to try to head off the threat of a full-blown regional war, with one of the European Union's top diplomats holding key talks with Iranian officials.

Meanwhile, Brett McGurk, the National Security Council's Middle East and North Africa coordinator, was in Saudi Arabia for talks that officials said were focused on persuading Iran to either not respond or take symbolic action.

The White House has tried to play down the possibility of a full-scale war, even though officials privately acknowledge it is one of the most sensitive moments since October 7.