MARKETS

If the bustling macroeconomic agenda were a concert, this week's headliner act would be the US political drama. With the attempted assassination of Donald Trump dominating the headlines, even the most captivating economic updates will have to fight for attention. After all, we're talking about a former President and a top contender in the current White House race.

Meanwhile, rates markets are still basking in the afterglow of last week's cooler inflation data. For those who can sift through the political noise, there's a buffet of market-moving macro updates to sample. This week's main courses include June US retail sales data, the July ECB meeting, and significant releases from Beijing, including the Q2 GDP report.

Slowing US job growth, the third consecutive rise in the unemployment rate, and a softer-than-expected CPI mark a turning point. While the Federal Reserve won't cut rates at its upcoming meeting, Chair Powell will likely set the stage for a potential cut in September. Powell is scheduled to speak at the Economic Club of Washington on Monday, where he's expected to stay on message. Other officials, including Chris Waller, will also weigh in on monetary policy, offering a mix of hawkish and dovish perspectives.

On the macro front, US retail sales will likely reflect softer consumer demand. The overwhelming evidence suggests the US economy is slowing, which is music to the Fed's ears as it seeks confirmation that inflation is on a sustainable downward path. This could be a blessing for bond traders. However, there's a point at which bad news is just bad news. If nominal spending weakens for June, it could indicate that consumers were tight-fisted every month in Q2, which is not exactly the hallmark of a healthy economy.

Regarding rate cuts, the ECB won't make any moves this week. Instead, Christine Lagarde may drop hints about the bank's plans for the September meeting, where policymakers could deliver the second cut of an easing cycle that began last month. FX markets understand that eurozone growth remains weak but positive, and inflation is falling, which might allow the ECB to cut rates twice in the second half of 2024. However, there's virtually no chance of a policy change at the July 18 meeting. The most likely scenario is a cut in September and December.

In China, growth probably hit around 5% in Q2, conveniently matching the Party's target for the year. Investors will closely examine the monthly activity data from Beijing, covering June, perhaps more closely than the headline growth figures. China's "two-speed" recovery, characterized by lacklustre retail sales and robust factory output, suggests overcapacity that could spill over into global markets. This will be a focal point as CCP officials convene for the Third Plenum, a gathering of top Party leaders this week. The stakes are high, but expectations are low, which aligns with Beijing's reluctance to implement significant demand-side stimulus needed to lift the economy from deflation.

The USD's recent slide has been like watching a slow-motion tumble down a grassy hill—bumpy but not entirely unexpected. Fed Chair Powell has been clear: he needs more "good data" before even considering rate cuts. June’s CPI report, however, was a pleasant surprise, showing inflation continuing to slow. This has resulted in market participants pricing more aggressively in Fed rate cuts. The upcoming FOMC meeting might offer stronger hints that rate cuts are on the horizon for September. The USD, meanwhile, has been following US yields lower, a trend that might stretch into the lazy days of August. While we're not suggesting a full-on bet against the USD at this time, staying selectively short versus the Pound and Aussie, we favour gold to express rate-cut expectations, which seems sensible for now, especially with the political melee in the US.

Are you thinking of trading Monday?

Generally, markets have a knack for bouncing back after unexpected political shocks. .

Still, a dramatic uptick in US political tension might cast a shadow over world markets this Monday following the shocking attempted assassination of former President Donald Trump. Asian markets will be the first to reflect any ripples from this event.

If this incident boosts Trump's election prospects, the "Trump-victory trades" could see a stronger dollar and a steeper US Treasury yield curve. Early in Monday's global session, Bitcoin jumped over 4% to hit $61,000. So far, we are not seeing a dramatic dive into the dollar.

Before Saturday's violence, traders already had a smorgasbord of issues to chew on—rising US rate cut expectations, potential Japanese FX intervention, and a flood of economic data from China, including Q2 GDP.

Last week's softer-than-expected US inflation report has kept the 'risk-on' sentiment alive, provided US bond yields, implied rates, and the dollar continue to ease. Rates traders are betting on a 75 basis points cut by the Fed this year, kicking off in September.

But let's not get too carried away. Suppose the optimism hinges on weakening growth and a softer labour market. In that case, it might be wise to temper your stock market excitement cautiously, especially as the Q2 US earnings season begins.

In Summary

There are far more important things going on in the world than markets, as the Trump assassination attempt makes abundantly clear. But here we are with the odds of a Trump victory looking more like a shoo-in if Real Clear Politics has it right. Hence, it will be interesting to see if the so-called inflationary "Trump Trade"—spurred by policies like immigration control and tariffs—gains meaningful momentum early in the week.

It is difficult to predict the impact of Saturday’s events on America and its political discourse. Suppose this isn't a call to action to stop false accusations on both sides of the political divide, curb divisive and inflammatory rhetoric, and move toward national unity. In that case, I'm not sure what it will take for it to happen. Definitely, it's a solemn time for democracy enthusiasts.

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