Market and economic review
Markets enter ‘wait and see’ mode ahead of the G20 summit
In contrast to the recent rally, risk assets as well as government bonds traded in a fairly narrow range this past week. This was driven by a build-up in anticipation leading up to the Trump-Xi meeting at the G20 summit.
The week began with geopolitics very much in focus as news reports suggested a recommencement of the US-China trade talks. This included a possibility that the US is willing to suspend the next round of tariffs on an additional $300bn of additional Chinese imports.
Staying with global politics, the broader US-Iran tensions remained elevated after President Trump announced new sanctions, directly targeting Iran’s Supreme Leader Khamenei and eight senior military officials. While the actual measures are only marginal additions to the current sanctions regime, they are symbolically significant and mark another degree of escalation. This added to recent strength in the oil price, taking the two-week rally in excess of 10%.
Lacklustre week for rates as the Federal Reserve moderates its dovish tone
Demand for government bonds faded after regional Federal Reserve (Fed) President Bullard signalled a moderate pushback on monetary policy easing. In his speech ahead of the Fed Chairman Powell’s address on Wednesday, he favoured a one-off “insurance rate cut” instead of an easing cycle and labelled a 50bp cut in base rates as overdone. Although not a hawkish view in itself, the recent comments from Bullard highlight a more cautious approach to rate cuts, especially given Bullard’s reputation as one of the more dovish members of the Federal Open Market Committee. As a reaction function, the probability of a 50bp rate cut in July reduced by 20%.
Fed Chairman Powell, in contrast, seemed intent on maintaining the Fed’s optionality without revealing too much information in his speech this week. Supporting both sides of the argument, he acknowledged the fall in inflation expectations while highlighting the Fed’s position to not overreact to any individual data point or short-term swing in sentiment.
Data releases were mixed, serving as a reminder that the global economy is not in the clear
The data releases started last week with the June German IFO (business climate indicator) which dropped by 0.5 points at the headline level, which was in line with consensus. The bigger worry, however, was the expectations component which slid by 1 point versus the consensus drop of 0.7. On a more positive note, inflation readings in Germany and France marginally beat expectations. The German year-on-year reading for June came in at 1.6% versus expectations of 1.4%, while the French CPI printed at 1.2% year-on-year versus an expectation of 1%. At the eurozone level, headline inflation was unchanged at 1.2% year-on-year in June, in line with the consensus.
In the US, the Dallas Fed manufacturing survey for June was the latest regional survey to show weakness at a headline level, with the print dropping -12.1 (versus -2.0 expected) and to the lowest level since June 2016. This follows the surprise weakness in both the Empire and Philly Fed surveys last week. Adding to this uncertainty, the consumer confidence release indicated a decline of almost 10 points to 121.5 in June (versus 131.0 expected), down from May’s revised 131.3 reading and the lowest reading since September 2017. In a similar vein, the headline durable goods orders slumped a lot more than expected in May based on the preliminary reading. The headline was -1.3% month-on-month compared to expectations for
-0.3%. These downside surprises, although on second-tier data, will heighten the market’s concern about the US economy ahead of the ISM manufacturing report due this coming week.
Outlook
The Trump-Xi meeting over the weekend and agreement on a ‘trade truce’ may be expected to be positive for risk asset at the start of the week.
This week will also be key in terms of primary data releases including the US ISM data. We will also get the PMI data releases in China, Japan and Europe. Markets will watch for any declines in the PMI release as it is an important indicator for the future economic environment.
Finally, the US June employment report on Friday will conclude the data release schedule. The big repricing in US Treasuries and the subsequent dovish turn by the Fed recently has increased anticipation around this report. Apart from the actual payrolls data, the average hourly earnings release and its possible feed-through in inflation expectations will be a key aspect to keep an eye on.
By Adam Kibble, investment specialist
