The week ahead is all about the interplay between a Fed that all but pre-committed to a July rate cut on Wednesday and the G20 meeting between Donald Trump and Xi Jinping.
The question, as documented in greater detail here, is whether Trump will see the dovish FOMC and record high US stocks as giving him scope to push the envelope further with China or as an opportunity to strike some kind of truce and add a bit of rocket fuel to the equity rally.
For Xi, the question is how to approach talks with a man (Trump) who is now widely seen as an unreliable negotiator, not above threatening tariffs on a country (Mexico) with which he’s already struck a comprehensive trade deal. The Hong Kong protests and a string of fresh data disappointments potentially weaken Xi’s hand, but, as Trump is acutely aware, Beijing has plenty of room to ease fiscal and monetary policy.
The MAGA economy is stumbling in its own right, but, paradoxically, a little bit of domestic economic weakness might be desirable for Trump to the extent it helps cement the case for rate cuts. As Deutsche Bank put it on Friday, the US economy “is both booming and it is headed for a recession.”
The odds of a comprehensive trade trace being struck at the G20 are obviously quite low. According to the 62 fund managers (representing nearly $700 billion in AUM) who participated in the June edition of BofA’s rates and FX sentiment survey, the G20 will produce a can-kick from Trump and Xi.
(BofA)
Note that while two-thirds expect a narrow agreement that delays additional escalations, only 18% believe it’s possible the two leaders will fail to agree to a ceasefire.
Again, Trump is doubtlessly aware that the threat of tariffs is a powerful incentive for the Fed to adopt a bias towards rate cuts, so the president likely won’t be too quick to take the trade war completely out of the equation for fear of prompting the Fed to reassess whether easing is appropriate. “A negative outcome could help bias the Fed towards a cut in July”, BofA dryly noted on Sunday.
Although the Trump administration appeared to offer something of an olive branch on Friday by shelving Mike Pence’s planned human rights speech, the decision to add four Chinese firms and a research institute to the Commerce department’s entities list was an escalation and it likely won’t be well received in Beijing.
They’ll be no shortage of Fedspeak to parse in the days leading up to the G20. Powell, Williams and Bullard will all speak, and there’s key data on deck as well.
“Following the Fed shift to an easing bias, markets will look to the Fed speakers this week including Powell, Williams and dissenter Bullard to assess the potential timing and size of rate cuts compared to market expectations”, Barclays wrote Sunday, reiterating their call for 50bp of front-loaded easing next month (and another 25bp cut in September) versus market pricing of -30bp in July, -52bp by September and -96bp over one year.
Recent market action is a Usual Suspects-type deal – that is, “It all makes sense if you look at it right – you gotta, stand back from it, you know.”
Stocks are bid on the assumption that dovish central banks will succeed in averting a recession; bonds are bid thanks to dovish central banks and the very same growth concerns that prompted the dovish lean in the first place; credit is bid because $13 trillion in negative-yielding debt creates a bullish technical for anything that offers any semblance of yield; the dollar is on the back foot because the Fed has finally committed to rate cuts and the US economy looks to be cracking; gold is bid because central banks are dovish and the dollar is falling; and oil is bid because Donald Trump looks like he might stumble into a shooting war with Iran.
It’s tempting to fade the rally in Treasurys with 10-year yields diving below 2% for the first time since 2016 and it’s equally tempting to fade stocks at all-time highs – especially as the S&P guns for one of its best months since 2009 ahead of the G20.
How the “jaws of death” close is the subject of vociferous debate. As a reminder, Treasurys are the most crowded trade on the planet.
(BofA)
As far as the dollar goes, DXY broke below its 200-DMA last week and if you ask Barclays, the greenback could weaken further against its developed market peers. “Our analysis has shown that historically the USD tends to weaken as the US yield curve steepens from a downward slope, on average around one month before the actual cutting cycle begins”, the bank wrote over the weekend. “The dollar weakness has historically been more evident vs. G10 currencies [and] month-end flows could reinforce that trend this week, as a preliminary run of our rebalancing model points to strong USD selling against all majors.”
(Barclays)
Meanwhile, folks will be watching gold, which is coming off its best week since April of 2016. I’m notoriously averse to any kind of “analysis” when it comes to shiny, yellow doorstops. It’s an inverse real yields play (unless rising real yields are contributing to market angst, in which case the normally negative correlation can flip), a weaker dollar helps and, obviously, risk-off sentiment is a boon.
The G20 is hardly the only geopolitical flashpoint. Iran will be in the headlines all week long following an aborted US airstrike and news that Trump personally approved an offensive cyber attack on IRGC missile systems in retaliation for the downing of a US drone. Over the weekend, the president said “major sanctions” on Tehran will be announced on Monday.
Oil surged nearly 10% last week, as geopolitical tensions finally outweighed global demand jitters and swelling US stockpiles.
It’s worth noting that while nobody wants World War III, a further rise in crude prices on the back of heightened tensions in the Mideast wouldn’t be the worst thing in the world for risk assets, considering falling inflation expectations are part and parcel of the bearish take on the global economy.
In Europe, the data calendar is relatively light, but, as Barclays writes, German IFO business confidence could deteriorate further “amid the ongoing slowing of global demand and negative momentum in manufacturing”. We aren’t far from a situation where the entirety of Germany’s bond market is trading with negative yields.
The Istanbul re-run had the potential to be another geopolitical land mine this week. While it’s too early to know how the market is going to interpret the results, Binali Yildirim went on national television and conceded defeat. “As of now, my competitor Imamoglu is leading. I congratulate him, wish him success”, he said. “I wish our friend Ekrem Imamoglu will bring good services to Istanbul.”
As of late Sunday, Erdogan looked set to accept the results. To wit:
Frankly, it’s hard to believe that’s going to be the end of this, but if it is, good for Turkey. This would mean there’s still hope for the country’s democracy.
Full calendar via BofA
Back when I was in that barbershop quarter in Skokie Illinois…