Financial markets are preparing for a tumultuous day, with important economic data releases and ongoing trade negotiations. Investors have become accustomed to looking forward to the U.S. core Consumer Price Index (CPI) report. Speculate that we’ll see a very small increase of 0.2% MoM. The Treasury will be running a 10-year auction later today, which can impact market dynamics. Coming up later today, May’s Federal budget balance figures will be released. This change will provide the public with a clearer picture of our nation’s economic wellbeing.
U.S. equity futures point to a weak open after some mild gains yesterday’s trading day. Unsurprisingly, market participants are already testing the water and tactics after the recent U.S.-China trade negotiations. According to news reports, negotiators have settled on a so-called “framework” to restart the flow of sensitive commodities, including rare earth materials. This deal is still not done until President Trump and President Xi put pen to paper, leaving a cloud of uncertainty hanging over it.
Trade Negotiations and Economic Implications
The recent turn of events in U.S.-China trade negotiations has rattled even the most seasoned investors and policymakers. The alleged “framework” is a positive step towards improving exchanges of key goods. This step is seen as a prelude to a possible thaw in the China-U.S. economic cold war. The deal’s success will depend on acceptance by both leaders, leaving a good measure of uncertainty in the air.
Analysts point out that China’s unwillingness to agree to lower its billion trade deficit—including through purchases of U.S. goods—is problematic. This creates tremendous opportunity inside Washington for trade hawks who want to see the administration take a tougher line against China. The ongoing trade tensions have implications not only for U.S.-China relations but for global supply chains and market sentiment.
While these negotiations continue to play out, market participants are on edge. Uncertain trade relations have spurred volatility in equity markets and currencies. Investors are quick to the draw with responses to breaking news and shifting narratives.
Domestic Economic Indicators
As well as all of this international drama, domestic economic data will be the critical factor in governing market expectations. Economists and investors alike will be looking for that expected U.S. core CPI increase of just 0.2% month-over-month. This data provides a key look under the hood at ongoing inflationary pressures.
Later today, we’ll get the Federal budget balance data for May, throwing yet another variable into the economic maelstrom. Analysts will be keeping a close eye on this data to determine general fiscal health and what this means for the Fed’s monetary policy going forward.
The market’s gaze is not limited to the U.S. though, as today sees the UK Spending Review announcement. With a new administration and a recent economic upheaval, this event will be an opportunity to understand where the money from the government will be spent. The pound plummeted after yesterday’s dismal jobs data dented hopes for the UK labor market’s continued strength.
Central Bank Speculations and Currency Performance
Beyond that, market participants have been betting on huge future moves from central banks. Given the current pricing, we should be bracing for a 15 bps hike in September. In order, look for a 17 basis point hike this month, then a larger 30 basis point increase by December. As these speculations play out, investors and other market participants will be eagerly watching for any cues from Federal Reserve officials about future changes in policy direction.
And the biggest spot of speculation, Treasury Secretary Scott Bessent. That’s one reason many are now looking to him as a potential successor to Jerome Powell at the Federal Reserve. His likely nomination would provide continuity and stability to the development of longer-term monetary policy strategies and how markets respond.
Over the last month, we’ve seen the Canadian dollar reaffirm its role as a top performer among G10 currencies. Its recent growth has been powered by a number of booming economic drivers. Risks to the growth outlook in Canada are decidedly to the downside. This turn of events has fueled speculation that the Bank of Canada will be compelled to cut rates as soon as July if the economy continues to perform poorly.