Strong chances for Fed cuts by year end

US Fed cut hopes

It appears that the focus for markets had shifted largely towards monetary policy from trade tensions in the past week, making this a key theme to look at this week. After the pivotal start to the week with Fed speakers including Fed chair Jerome Powell falling behind the voices suggesting potential interest rate adjustments to sustain the economic expansion, the key piece of labour market data on Friday had likewise supported the probability.

The broad takeaway from the payrolls release had been the slowing labour market growth as headline non-farm payrolls saw a significant miss at 75K against the 185K consensus while wage inflation decelerated. The trade related manufacturing employment had also slumped to reflect the bite from both escalating trade tensions and the moderation in economic expansion. According to the CME FedWatch tool, we are now staring down at a market that had priced in approximately 2.5 25 basis points Fed rate cuts by the year-end, one to watch going into the Federal Open Market Committee (FOMC) meeting next week. The blackout week sees a vacuum of Fed speakers and thereby places the attention on the slew of data due in the week.

All the above said, we would not be one to discount the trade tension’s influence either seeing the US-Mexico truce inspired gains into Friday. Compared to the broader US-China trade conflict, the US-Mexico issue appears to be a lower hanging fruit for the Trump administration and one that is expected to fade into the background with the deal that had reportedly been established. The US-China trade conflict meanwhile reckoned to remain an on-going concern that looks have been caught in stalemate.

Asia open

Following suit with the Wall Street glimmer, expect Asia markets to commence the week on a strong footing. The breaking news over the weekend had been on the Hong Kong protest capturing the market’s attention. While the matter had escalated quickly, this would be a moving piece to watch. Even if protests do continue for this contentious political issue, it may be some time before any impact feed through to economic data such as in the recent 2014 Occupy Central case and therefore may not invite that knee-jerk reaction from markets. As it is, the Hong Kong market had commenced the day in green.

The key for the packed data-day ahead would be with China’s trade data. As told in our Asia week ahead, both exports and imports expected to deteriorate to reflect the softening in external conditions in May that could cast a shadow on markets if we find further surprises to the downside, one to watch.

Friday: S&P 500 +1.05%; DJIA +1.02%; DAX +0.77%; FTSE +0.99%