Mexican tariffs and more data that can help reduce rates

Stocks rallied strongly to the idea that the Federal Reserve will soon reduce interest rates, but the market must at some point see progress in trade wars and economic weakness that is bothering the Fed .

The surprisingly flexible May jobs report, released on Friday, showed only 75,000 jobs created, 100,000 less than expected. This immediately raised fears that the Fed would reduce its rates as early as July, as the labor market, which has long resisted, is now seeing the impact of what data in the manufacturing sector is already showing.

Difficulties in the labor market raise fears that the weakness of the trade-related manufacturing sector will infiltrate other sectors of the economy. For this reason, economic data, especially those of the CPI on Wednesday, could be a key market factor in the coming week, as investors try to play when the Fed could lower its rates. There are also retail sales and industrial production on Friday.

"I think investors will be nervous about trade and tariffs, which will continue to fuel feelings next week, and I find it interesting that you have this idea that central banks have put Powell in, to save the day. situation, "said Michael Arone, chief investment strategist at State Street Global Advisors." This may seem beneficial to investors and extend the cycle longer, but I think it aggravates the problems in the long run … That will end by catching up with the market in one way or another. "

Investors are waiting for developments in the trade relations between China and the United States, and they are also closely monitoring developments with Mexico. President Donald Trump has threatened to tax all Mexican goods by 25%, starting with a 5% tariff Monday, if Mexico does not show that it is making progress to prevent migrants from reaching the United States. On Friday, Trump said in a tweet that there is a good chance that an agreement will be reached with Mexico.

"The market was shrugging this week, the week was strong for the market, so [investors] seems to be moving forward, "said Arone, noting that investors were looking beyond Mexican rates and focusing on the Fed's rate cuts." The market seems to applaud [rate cuts] for the moment, but I am not sure that accommodative monetary policy is in itself a sufficient catalyst for better economic growth and better incomes. We need more than that. This could be a quick shot or a high sugar. "

The stock rallied after the release of the jobs report, with gains on Friday limiting what was already expected to be the strongest week for stocks since November. The S & P 500 rose 4.4% for the week, settling Friday at 2,873. Treasury yields fell to their lowest levels since December 2017 last week, rising 2.05 % over 10 years Friday. Futures contracts on federal funds also changed significantly and provided for a possibility of reducing rates by a quarter point in July by 95%.

Jon Hill, strategist in charge of interest rates at BMO, said the markets are now focusing on the timing of a possible rate cut by the Fed and on the possibility that the Fed will cut back on interest rates. a point or half a point initially. This makes economic data particularly important as investors observe whether weakness has spread to consumers in the next retail sales report on Friday, or if inflation is weakening. The core CPI has exceeded the 2% target set by the Fed.

"You would think that the [fed funds futures] The market revolves around a cup in July, a cup in September and another in December. We expect base rate cuts of 2.9, 25 for 2019. This really increases next week's CPI stakes, given that the CPI is above 2%, and also now that we are in the blackout period of the Fed. The Fed will not issue any additional guidance this week. Hill said Fed officials do not speak publicly just before the meetings, and they will meet on June 18.

The strategists said the market also opposed the idea that President Donald Trump would not allow commercial disputes to deteriorate to the point of causing a collapse of the stock markets, since he considers the market as a reflection of its success. This is what is called "Trump Put".

Dubravko Lakos-Bujas, JP Morgan's equity strategist, said that if Trump took into account his threat to impose tariffs on the remaining $ 300 billion worth of Chinese goods, this could lead to a selloff, and the S & P 500 could go down to 2,500. But it also expects the sale to result in a "Trump" option and a "Fed" proposal, which means that Trump would act and that the Fed could cut rates to ease financial conditions and help the economy. The strategist said that he was maintaining his goal of 3,000 on the S & P for the year.

"We believe that the next series of tariffs threatened by the Trump administration – Mexico at 5% and Phase III in China – could significantly increase the risk of contraction of the business cycle and profits in the United States", he wrote. Mr. Lakos-Bujas said that he is still waiting at the conclusion of trade agreements, in part because the Trump administration will not want to risk a market meltdown or recession before the elections.

Lakos-Bujas said there was a wide range of possible outcomes, including a positive scenario in which commercial peace would be achieved, incomes improved and the S & P higher than 3,200.

Next week, investors will also monitor Chinese data. On Monday, China will release a report on trade balance, imports and exports, first quarter GDP, current account holdings and foreign exchange reserves. Chinese inflation data is released on Wednesday.

What to watch

On Monday

Mexican tariff deadline

10am JOLTS

Tuesday

NFIB survey of 6h00

8:30 pm PPI

Wednesday

8:30 am CPI

2:00 p.m.. Federal budget

Thursday

8:30 am Unemployment claims

8:30 am Import price

Friday

8:30 am Retail

9:15 Industrial production

10:00 am: consumer sentiment

10 am Business Inventories