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  • Weekly global market focus
  • Time is growing short for Chinese confirmation of Trump-Xi meeting
  • FOMC at this week's meeting may start laying the groundwork for a rate cut
 

Weekly global market focus -- The U.S. markets this week will focus on (1) US/Chinese trade developments as the U.S. continues to wait to see if China will confirm a Trump-Xi meeting at the 2-day G-20 meeting that begins next Friday in Japan and as the USTR holds a hearing today on new Chinese tariffs, (2) US/Iran tensions and whether there are any new tanker attacks this week or U.S. military responses, (3) whether the FOMC at its meeting on Tue/Wed cuts interest rates or at least adopts a more dovish tone, (4) a relatively light U.S. economic calendar with the focus on housing reports, (5) the Treasury's sale of $15 billion of 5-year TIPS on Thursday, and (6) earnings reports from seven of the S&P 500 companies including Adobe on Tuesday and Oracle on Wednesday.

In Europe, the focus will be on any developments from the ECB's 3-day policy retreat in Sintra, Portugal that begins today.  ECB President Draghi today will deliver the opening remarks at that forum.  EU leaders at their summit on Thursday and Friday are expected to discuss who to appoint as the new ECB President when Mr. Draghi's term expires on October 31.  The ECB on Thursday will release its monthly economic bulletin.  Friday brings the June Eurozone manufacturing PMI, which is expected to show a +0.3 point increase to 48.0 after May's -0.2 point decline to 47.7.

In the UK, Conservative Party MPs on Tuesday through Thursday will hold votes to progressively whittle down the list of six party-leader candidates to a final pair, which will then be voted on by the grassroot members of Conservative Party.  The new party leader and Prime Minister is expected to take power in the week of July 22.  Boris Johnson is the heavy favorite to become the new Prime Minister with his betting odds at 89% at PredictIt.org.

The Bank of England at its meeting on Thursday is expected to leave its base rate unchanged at 0.75%, but is expected to maintain a hawkish tone due to the weak pound and inflation risks.

In Asia, the markets continue to watch the Chinese stock market and yuan ahead of the G-20 meeting that begins next Friday.  Chinese officials will undoubtedly try to keep stocks and the yuan stable ahead of that G-20 meeting but those markets could easily slide after the meeting if there is a negative outcome from the expected Trump-Xi meeting.  The Shanghai Composite index in the past six weeks has traded in an unnaturally narrow range.  The PBOC last week set daily fixes for the yuan that were stronger than market expectations in an apparent effort to prevent any fresh weakness in the yuan ahead of the G-20 meeting.  The yuan last Monday temporarily weakened to a 6-1/2 month low but then snapped back into the sideways trading range after indications of support from the PBOC.

The BOJ at this week's policy meeting is expected to leave its monetary policy unchanged with its 10-year JGB target unchanged at zero with a target band of +/- 0.20%.  The 10-year JGB yield is currently trading at the lower end of that band at a 2-3/4 year low of -0.13% in sympathy with low bond yields in the rest of the developed world.  The BOJ is likely to keep its policy unchanged ahead of upper house elections in July, although further dovish moves are possible if US/Japanese trade tensions worsen or the BOJ believes it is needs to make faster progress on pushing inflation up towards its target. 

Time is growing short for Chinese confirmation of Trump-Xi meeting -- The Chinese government continues to needle President Trump by refusing to confirm if there will be a Trump-Xi meeting at the G20 meeting that begins next Friday in Japan.  President Trump has said that if President Xi refuses a meeting, he will immediately impose a new 25% tariff on another $300 billion of Chinese goods.  Last week, Mr. Trump said that "it doesn't matter" if he meets with President Xi since the U.S. is collecting tariff revenue.

Mr. Trump's threat of a new 25% tariff on another $300 billion of Chinese goods will be in the news today as the U.S. Trade Representative's office holds a required public hearing on those tariffs.  There is a long list of companies that are opposed to those tariffs, which would raise prices on a substantial number of goods and further disrupt supply chains of U.S. companies.  USTR Lighthizer tomorrow will appear before the Senate Finance Committee amidst general opposition among Senate Republicans to Mr. Trump's use of tariffs, especially in farm states that have been hard-hit by retaliatory Chinese tariffs.

 

FOMC at this week's meeting may start laying the groundwork for a rate cut -- The market is discounting only a minor 21% chance of a rate cut at the 2-day FOMC meeting that begins on Tuesday.  The FOMC is under heavy pressure from President Trump for a rate cut, but the FOMC in our view has not laid enough groundwork for a rate cut.  Fed officials in recent comments have nodded towards the possibility of a rate cut if the U.S. economy weakens.  However, the Fed in our view will not want to cut rates as soon as this week for fear of being accused of buckling under pressure from the White House.  In addition, the recent U.S. economic data has been adequate and inflation is not far below target at +1.6% (core PCE deflator) although the 10-year breakeven rate last week fell sharply to a new 2-3/4 year low of 1.64%.

While a rate cut seems unlikely, the FOMC at this week's meeting may well begin laying the groundwork for a rate cut at the next meeting on July 30-31 (with market odds at 86%) by at least shifting the Fed dots in a more dovish direction from the current view of an unchanged funds rate this year and a +25 bp hike in 2020. The FOMC might also adopt more dovish language in its post-meeting statement.  The FOMC at this week's meeting will release an updated set of economic forecasts and a new set of Fed-dot forecasts for the funds rate.

 

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