The Week Ahead: Fed blackout amid Trade War & Peace

10/06/2019

There is much to keep us glued to our screens this week as traders digest Friday’s disappointing US jobs report which was weak across the board on the headline, revisions and underlying details. This sparked a rally in US stocks which had their best week since November.

The market is telling the Fed Chair Powell to cut rates very soon, with Fed funds futures pricing about an 80% chance of a cut in July and roughly three cuts in total for the year. Notably, we have only three more meetings with economic projections this year, the first being in 10 days’ time. Many Fed watchers think over four cuts by the end of 2020 is ‘over-priced’ but the risks facing the US economy are clearly building. The Fed now enters its blackout period ahead of its rate policy meeting which we means we get to hear their thoughts on the Mexico situation or weak jobs release until the acutal FOMC decision.

Wednesday’s US inflation release will be a focus, especially after the decelerating wage growth figures last week. Friday’s retail sales data Stateside should further inform on how the US consumer is holding up in this volatile external environment and whether there is a rebound from the prior month’s weakness in the core figure.

Trade tensions will inevitably continue this week as the G20 meeting between President Trump and Chinese President Xi Jinping looms large at the end of the month. Despite Friday’s truce between the US and Mexico, many fear that Mexico will remain vulnerable to future attacks by President Trump as he looks to make immigration a cornerstone of his 2020 re-election campaign.

After seeing the ECB not delivering to market expectations last week, traders will no doubt still be absorbing Mario Draghi’s latest press conference as the countdown and speculation build ahead of his departure in October.

To recap, the ECB ‘eased’ its guidance to keep rates at current low levels at least through the first half of 2020. Some governors also raised the issue of cutting the deposit rate or restarted QE. However, the lack of clear signals that easing is coming disappointed many and it seems that the market will have a hard time selling the single currency on the expectation of easing unless ECB officials start addressing this in public.

Finally, we get UK data in the form of an expected soft monthly GDP reading and a deceleration in wage growth. It seems the UK domestic economy is continuing to take the hit from ongoing Brexit uncertainty.

Much focus of course now shifts to the Conservative leadership contest which officially kicks off this week and the battle over hard Brexit and no-deal candidates. We expect much pandering to Conservative party members as they are the ones who will ultimately vote on the top two contenders chosen by Conservative MPs. Markets seem to dislike the prospect of firm favourite Boris Johnson in number 10 and the tone of the contest, which will extend into July, should make for a weak undertone in sterling.

Here's what to look out for on the calendar across global markets this week:

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