Headlines were quiet last week with major market indices mostly flat. Market participants appear to be holding their breath for any movement on the US-China trade dispute and any clarification of Fed policy that can be gleaned from this week’s meeting. Between the US and China, both appear to be doubling down with no indication of compromise or concession, at least not publicly. US Treasury Secretary Mnuchin says that Trump is “perfectly happy to move forward with tariffs” if there is no progress while China’s central bank Governor Yi says they have plenty of room in the fiscal and monetary toolkit to mitigate the effects of the trade war. The two are scheduled to meet at the G20 summit June 28-29 in Osaka. Both sides have been silent about the upcoming meeting so an immediate deal is not likely; the optimistic outcome is a temporary truce on further escalations if they can agree to continue discussions.
PPI and CPI inflation numbers remain subdued and still shy of Fed target. Consumer sentiment fell in May, primarily due to the trade dispute headlines, with year-ahead inflation expectations also falling. Job openings remain high and the jobless claims level remains low, reflecting the tight labor market conditions from a 3.6% unemployment rate. Retail sales were strong with upward revisions to prior month figures.
The Federal Open Market Committee (FOMC) will meet this week with a meeting announcement Wednesday at 2 PM. The predominant market expectation is for no change to short-term interest rates. The majority opinion shifts to a rate cut for the July 31 meeting plus a second cut for the September 18 meeting. Market participants are expecting a likely pivot to looser monetary policy rhetoric. Such a tone would be a large shift from Powell’s rate comments as recently as May 1, stating “We don’t see a strong case for moving in either direction,” although market participants were betting on a coming rate cut. Aside from the FOMC meeting Wednesday, this week will see releases on housing and the Fed Business Outlook Survey.
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