The Market Today

THIS WEEK’S CALENDAR

Important Data on Inflation and Consumption Ahead of FOMC Meeting: With one week until the Fed’s next policy decision (June 19), all of the economic data are important now.  Particularly this week’s CPI inflation report on Wednesday and Friday’s retail sales report.  One of the justifications for the Fed to cut rates this year will be the surprisingly weak inflation.  If Wednesday’s report is weaker-than-expected, once again, it could bring a June cut into the picture.  Likewise, the consumer has been the backbone of economic stability and another disappointing retail sales report would be tough to ignore.  For now, Fed Funds Futures are projecting no cut in June, almost a 100% chance of a cut in July, and a 100% chance of a second cut by year-end.

TRADING ACTIVITY

Overnight – Sentiment Picks Up After White House Waives Off Mexico Tariffs: Global stocks rose Monday and yields are moving higher after new trade barriers between North American trading partners were avoided. Tariffs on goods shipped into the U.S. from Mexico, which were scheduled to be put in place today, have been cancelled for now after President Trump announced Friday night that the two countries had reached a deal to address immigration issues. The planned tariffs were announced on May 31 as leverage to force Mexico to be more proactive in stemming flow of immigrants across the border. President Trump tweeted Friday after markets closed that Mexico “agreed to take strong measures” to help address the U.S.’s concerns. The Mexican peso jumped 1.7% Monday against the Dollar after weakening 2.4% since the tariff plan was originally announced. U.S. equity futures were stronger by 0.5% around 6:45 a.m. CT and Treasury yields were higher. The response in global markets looks quite similar. Most indices across Asia were up more than 1% while the Stoxx Europe 600 inched 0.2% higher. Japan’s economy grew 2.2% in 1Q, up 0.1% from initial estimates, and Chinese exports rose unexpectedly in May. Chinese trade data, seen as a barometer of the effects of trade tensions, showed exports rose 1.1% YoY in May versus a 3.9% decline expected. Imports, however, declined 8.5% last month, more than doubling the expected contraction. In Europe, the British pound weakened and U.K. yields were lagging the mainland on news the economy contracted more than expected in April as manufacturing output sank by the most since 2002 amid continued Brexit confusion. At 7:30 a.m. CT, the 2-year Treasury yield had added 3.6 bps to 1.89% and the 10-year yield rose 5.2 bps to 2.13%.

NOTEWORTHY NEWS

ICYMI – Vining Sparks Weekly Market Recap (click here): Yields sank and stocks rallied as expectations for easier monetary policy was solidified last week.  The economic data were generally disappointing with the ISM Manufacturing index falling and the ADP and BLS job reports both showing weak results for job growth in May.  The only positive news seemed to be the ISM Non-Manufacturing index which beat expectations and the Fed’s Beige Book which showed moderate growth continuing. After markets closed Friday, President Trump announced that tariffs would not be place on Mexican imports today as a deal had been reached (more above).  For the week, the 2-year yield fell 7 bps while the 10-year yield dropped 4 bps.  Fed Funds Futures contracts are pricing in almost a 100% chance of a rate cut in July and another rate cut by year-end.