June Ends in Japan: June will close out with the much anticipated President Trump/President Xi meetings during the G20 in Japan, held June 28-29. It is difficult to envision an agreement getting done given the verbiage headed into the meeting thus far. Perhaps Trump and Xi will kick the can down the road, agreeing to further talks at a later date without new tariffs in the meantime. That outcome likely would sit well for US equity indexes which have been sensitive to trade announcements/presidential tariff tweets (chart below).
Of course, further tariff threats by either country would negatively impact US equities. The Federal Reserve also will want to see if there is any outcome from the meetings ahead of the July FOMC meeting. Chairman Powell did say that the Fed wanted to see how global growth risks and trade tensions would impact economic activity.
Chart: Tariff Tweet-Storm
Source: Bloomberg LLP
July Fireworks: July starts and ends with a bang as June payrolls will be released July 5th and the FOMC monetary policy meeting is July 30 -31. July payrolls will be a key indicator into the July FOMC meeting. The economic consensus as surveyed by Bloomberg currently expects a +169k reading for June payrolls. Powell, in the June FOMC press conference, stressed that the Fed was in data dependency mode.
May payrolls, released on June 7th, were disappointing — coming in at +75k vs. expectations of +175k. Safe-haven JPY strengthened about 0.6% vs. USD on that disappointing release. EUR was also about 0.4% stronger vs. USD. US equity indexes were higher and the US 2 year and 10 year yields lower on the day all on the hope of a Fed rate cut. Expect a similar market reaction if the June payrolls disappoint. The wrench in the works for markets and seemingly the Fed, would be if June US payrolls surprised notably to the upside.
In the meantime, this week, the market has approximately a 62% change of the Fed cutting 25 bps priced in at the July meeting. We will hear more from Chairman Powell on Tuesday, June 25th as he speaks at 1pm ET at the Council on Foreign Relations on, importantly, the economic outlook and monetary policy.
57.6%: Much has been made about the USD Index (“DXY”) breaking below the 200 day moving average support level. Of course, in tandem, EURUSD has also broken topside through its 200 day moving average resistance. I get the question: “what is my view on the DXY Index?” often and, of course, my starting point is always my EURUSD view, as Euro 57.6% of the DXY Index.
EURUSD has been having a moment, heading toward its March 2019 high of 1.1448 after having been rangy 1.1350 – 1.1100 since April. However, all it took was a dovish comment my ECB President Draghi last week to send EURUSD temporarily plunging lower. With the growth and inflation outlook in Europe weakening further, it is difficult to see Euro strength as sustainable.
Chart: USD (“DXY”) Index and EURUSD moving in tandemSource: Bloomberg LLP
A Bit of Risk-On: However, a Fed rate could possibly weaken the USD further with yield support continuing to erode, but other G10 central banks are either sounding more dovish and/or have all ready begun to cut their respective policy rates as well. Currently, markets seem to be in a risk on spot as higher yield EM currencies rally, US equities hold in and volatility is behaving. But another trade war flair up or more evidence of a global growth downturn would diminish risk-on sentiment and make the USD strengthen once again.
Let’s hope the skies don’t darken for markets as they did on my run yesterday. But either way, just keep on keeping on — navigating markets and running the mile you are in.