• US nonfarm payrolls figure disappoints
  • US inflation and consumers spending to determine the Fed’s next move
  • ECB to launch a new stimulus program
  • Geopolitics remains a critical factor in investors decisions

 

Risk assets received a boost last week while safe havens gave up some gains after the United States and China agreed to return to the negotiating table in early October. The reaction we’ve seen in markets shows how desperate investors are for any positive signs related to trade talks. While it’s too early to conclude that a deal or a truce may be reached, the news that both sides are willing to talk again appeared enough to lift sentiment. However, there doesn’t seem to be any hint that either country will provide concessions, suggesting that the initial celebration may prove to be premature.

The latest US jobs report didn’t indicate any turnaround in fundamentals. In fact, the US economy added jobs well below market estimates in August at 130K, versus the expectation of 158K. The added jobs were also 32K below this year’s average of 162K. While the figures do look disappointing, they aren’t terribly bad. Unemployment held at 3.7% for the third consecutive month and average hourly earnings rose 0.4%. The conclusion that can be drawn from the latest NFP and most recent PMI data is that the US economy is losing momentum; however, it remains far from an imminent recession.

Attention now should be turned to consumer spending which has been the brightest spot in the economy. If US consumers show any signs of closing their wallets amid the ongoing trade dispute, expect the Federal Reserve to move aggressively in easing monetary policy. However, tariffs on Chinese goods are still insignificant yet, as the bulk of tariffs that will directly impact consumers may come in October and December. Another piece of data that the Fed will be taking into their consideration for the FOMC next week is consumer prices. US core inflation is anticipated to accelerate to 2.3% y-o-y in August from 2.2% in the previous month. Any upside surprise in prices may make the Fed’s job more complicated and give the Dollar another upward push.

This week’s key event is the European Central Bank rate decision on Thursday. Investors across the world are widely anticipating a new stimulus package from the central bank. Markets are expecting at least a 0.1% cut in deposit rate and a renewed QE program. The Euro will move according to how aggressive the easing package comes. A monthly purchase program of 30 – 40 billion Euros a month may satisfy bond traders who have pulled yields to record lows in recent weeks, and that is likely to put further pressure on the EURUSD, sending it below 1.09. A bond purchase program less than that will disappoint bond traders. However, Mr. Draghi is facing very challenging times given the opposition from some members, which is likely to make this meeting the most interesting one in several years.

Geopolitical developments should also be watched carefully by traders and investors. Whether it’s Brexit drama, headlines on the trade war, Hong Kong’s protests, and even the OPEC meeting taking place in Abu Dhabi after Saudi Arabia’s decision to replace its energy minister.

 

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