Markets started the week in a bit slow because of holidays in some part of EU yesterday, and due to an unknown out come from US-China trade talks.
Last week NFP came in stronger than expected, showing the labor market is still solid, so yeilds turned up lately as there’s no real reason to cut rates. Keep in mind that CPI is also expected to tick higher, 2.5% vs 2.3%, and crude oil was up as well. So if inflation data comes in around expectations, Powell has no excuse to ease.
Also, let’s not forget we have US-China trade talks going on right now. If negotiations go well and both sides are satisfied, that would be very positive for the economy — which, after all, is everyone’s goal. In that case, another argument against rate cuts emerges. Because if you cut now, even as the economy possibly returns to normal on the back of successful talks, inflation is more likely to drift toward 3% in the coming months rather than fall to the Fed’s 2% target. And thats certaibnly something FED will look to avoid.
What about the market reaction if talks go well? My assumption is stocks go higher, and evne yileds can rise a bit or stay sideways while USD is expected to break lower. And we also have some nice bearish pattern on DXY too.
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Grega
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