Traders will be looking for clarity next week.
Whether they’ll get it is another matter.
Unless Donald Trump intends to keep markets on tenterhooks until the last possible minute (i.e., until next Saturday evening), there will be some official word on the planned tariff escalation scheduled for December 15. In fact, it wouldn’t be entirely surprising if the notoriously mercurial US president gave some indication as to which way he’s leaning (yay or nay) as early as this weekend. As of now, 15% levies will be applied to $160 billion in Chinese goods in eight days.
Waiting until Friday or Saturday of next week risks another stumble for risk assets like that which unfolded last week on the heels of Trump’s tweets about Brazil and Argentina, and his subsequent allusion to waiting until after the election to strike a deal with Beijing.
And yet, he may want to wait on the Fed or, more to the point, wait to see whether Jerome Powell manages to put a dovish spin on the statement during his post-FOMC press conference. That effort – assuming Powell does, in fact, plan to lean dovish in the course of holding rates steady – will either be assisted or impeded by the new dots. Trump won’t be parsing the SEP, and he won’t have to. The market will let him know the verdict between 2:30 and the closing bell on Wednesday.
We can’t emphasize this enough: It was Powell’s “failure” to put a dovish enough spin on the July rate cut that precipitated Trump’s decision to break the Osaka truce with Xi just 24 hours later. The rest, as they say, is history.
If there’s no definitive word from the White House on the tariffs by the time Powell takes the podium on Wednesday afternoon, pray for a dovish message.
In any event, some are pitching this as a kind of “make or break” week for Treasury yields. There’s a pseudo-consensus on Wall Street around the resumption of the pro-cyclical rotation that peeked its head out early last month and also in early September. That’s contingent on a trade deescalation and an inflection (for the better) in the incoming macro data.
Last week brought plenty of ostensibly good news on the macro front (e.g., China PMIs, European final PMIs for November, the US jobs report, University of Michigan sentiment), but also some bad news (e.g., German industrial production, ISM and ADP).
The final word on the December 15 tariffs along with the Fed and ECB meetings plus the UK election could prove decisive when it comes to breaking the stalemate which has left yields some semblance of range bound.
“Investors face a crush of events next week that could sweep away the biggest hurdles to a full-blown race into riskier assets, if things line up just right”, Bloomberg wrote Saturday, adding that “over the second half of the week, possible catalysts for a Treasury market sell-off will arrive in close succession: Policy decisions from the US and euro-zone central banks are expected to offer no fresh hints of easing in the cards, and the UK election could finally pave a more resolute course for an exit from the European Union”.
Not everyone is convinced that a benign resolution to the December 15 tariff issue and the December FOMC will prove decisive for rates.
“Such an outcome suggests tactical upside risk to yields as further reduction in left-tail risk should boost risk premia—we expect 10y UST yields to rise towards 2% by year-end on a deal”, Goldman wrote Friday evening, of a partial agreement that sees the US and China roll back some duties. “[The] FOMC meeting [is] unlikely to be a catalyst for rate moves”, the bank went on to say, noting that there’s “little scope for much surprise either to downside or upside” at next week’s proceedings.
Although these types of “big weeks” (i.e., periods that are billed ahead of time as being pivotal) have a tendency to underwhelm, it’s somewhat difficult to imagine that the next five trading days somehow go off without any fireworks.
Call it a hunch, but we’d bet someone, somewhere, will cause a stir.