The Week Ahead: ‘Powell Put’ in play as the Fed goes silent

It is traditionally quiet on the data front the week after US employment data, but there is much to keep us glued to our screens as traders digest Friday’s disappointing 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 as the Fed enters its blackout period ahead of its rate policy meeting.  

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 war and peace 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. The US President stated last week that he will decide if he is to enact tariffs on another $325bn of Chinese imports after this meeting. The usual Trump ‘carrot’ in this tit-for-tat game appeared after these comments when the President said that China wanted a deal and he predicted the two sides would definitely reach agreement.

Despite Friday’s truce between the US and Mexico, many also 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. 

Interestingly, Thursday’s announcement did little to lift depressed inflation expectations that currently trade close to all-time lows. The widely watched 5-year/5-year EUR inflation forwards sit near levels where the ECB previously stepped up its stimulus measures at an earlier stage.

After a week where Fed and ECB monetary policy has been in focus, the market is now left with a Fed ready to cut rates and an ECB which has only started discussing how it would respond if the economy deteriorated even further. 

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.