MNI US Macro Weekly: Optimism Ahead Of US-China Talks

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Executive Summary

A quieter data docket and the Fed not rocking the boat on Wednesday has seen trade developments and expectations of further deals very much set the tone this week. 

• Monday’s hawkish reaction to a better-than-expected ISM Services report was reversed on Tuesday but still held onto a significant hawkish re-pricing seen in the second half of the prior week on a better-than-expected ISM Manufacturing report (Thu) before a solid payrolls report (Fri).
• Wednesday’s FOMC decision had little net immediate reaction, with a modest dovish read on the announcement itself reversed in Powell’s press conference, but prospects of a US-UK trade pact floated afterwards helped extend trade optimism following a touting of a removal of Biden-era chip curbs.
• Rather than a “sell the fact”-type reaction to Thursday’s actual US-UK trade pact announcement, the sell-off in US rates accelerated and set the tone for the remainder of the week.
• A typically dovish Williams on Friday keeping to a similar stance to Powell might have helped at the margin but the moves are likely on expectations of some positive developments at Saturday’s Geneva-based talks between the US and China, led by US Tsy Sec Bessent and China Vice Premier He Lifeng.
• A next Fed cut is fully priced for the Sept FOMC before a cumulative 68bp of cuts for the year.
• SOFR implied terminal yields have seen a smaller increase over the week but are still 4bp higher, at ~3.25% (seen in SFRZ6 vs U6 a week ago). That’s a large adjustment from sub 2.9% prior to Thursday’s ISM mfg but still 15bp lower than before Apr 2 Liberation Day tariff announcement levels.
• Next week sees a return of some major US data releases, with CPI on Tuesday before PPI and retail sales on Thursday along with some 20 minutes of opening remarks from Fed Chair Powell.
• The Fed appears to be putting greater focus on hard data but any signs of softness, especially in retail sales, will be important. On the much weaker consumer sentiment figures, Powell said on Wednesday that there has “not been a strong link at all” between sentiment data and consumer spending, but with a dovish caveat that “we haven’t had a move of this speed and size. So it wouldn’t be the case that we are looking at this and just completely dismissing. But it’s another reason to wait and see.”