The Global Markets Weekly – 5/25/18

Posted May 29, 2018 by rvillareal

Markets Flying Solo Until Mid June Central Bank Meetings

Some repositioning in markets ahead of the long weekend amid headline and data risks ahead, all of that ahead of key monetary policy updates next month. Geopolitics whipsawed investors midweek on Korea headlines, spreads are markedly wider again in Italy (less-so but noticeable in Spain), strains in emerging markets increased, core European and U.S. sovereign yields are down sharply, and crude oil prices fell over 6% by week’s end, while the dollar advanced.

Mid June will bring a trio of key central bank meetings, a three-day stretch starting June 13^th with the Fed, followed by the ECB on the 14^th and the BOJ on the 15^th. Fed officials are signaling to markets they remain focused on mandated goals, with Powell on Friday among others suggesting a bit less hand holding for markets than they’ve become accustomed to in the post-crisis period. It isn’t an accident that Powell dropped the “moral hazard” line into comments Friday.

The Minutes released last Friday indicated (1) that briefly touching 2% isn’t necessarily “mission accomplished” on the inflation side of the mandate and (2) yield curve flattening remains something to keep an eye on, which helped lend a dovish tone. These remain caveats that come in the context of an improved growth backdrop and strong labor market, so market participants may do well to heed the advice of looking less at the specifics of long-term forward guidance (which will undoubtedly prove wrong), and more at the cadence evident in the data flow. Signals are clearer for momentum in the U.S., which has had ripple effects around the globe as the case for monetary tightening remains clear at the moment.

For the ECB, there is plenty of debate about the nature of the recent activity slowdown, with the PMI’s last week not incredibly encouraging. Alternative interpretations of a temporary soft patch in a firmer trend, versus something more ominous weren’t settled in May data. Insufficient holiday adjustments may have played a role, adding to weather and the flu as depressing factors earlier this year. A cross-check on Japan’s May manufacturing PMI revealed a similar trend, also down in data released last week to its weakest print since mid-2017. Results in Asia including Korea and Singapore have been soft, while German figures were the weakest in a year or more, on both the services and manufacturing fronts.

Coming Week’s Key Indicators and Events

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