What's The Next Catalyst For Markets?

BusinessToday

2 days ago

Global equities, as measured by the MSCI All Country World Index, reached a new record high this week, fully recovering losses incurred since President Trump's 'Liberation Day' tariffs in early April. While trade tensions briefly resurfaced, concerns of an all-out trade war have abated following a crucial phone call between President Trump and China's President Xi, according to an editorial by Standard Chartered Bank.
The market's attention is now turning to upcoming 'hard' economic data for May, specifically US non-farm payrolls and inflation figures. A softer US employment report combined with stable inflation could reignite expectations for a Federal Reserve rate cut, potentially propelling US equities to further record highs.
Trade Dynamics and the 'Trump Put'
This week saw President Trump double US tariffs on steel and aluminum imports to 50%, with the UK being the sole exemption after signing a preliminary trade pact. Despite facing court challenges and criticism for a perceived softening on trade, Trump may seek alternative legal avenues to impose targeted tariffs to encourage trade partners back to the negotiating table. However, Standard Chartered does not anticipate a full-blown trade war, especially after the Trump-Xi call aimed at resetting trade discussions. The bank noted that the 'Trump put' — the President's tendency to scale back aggressive trade stances when markets react negatively — remains in effect, citing his reversal of tariffs in April after a significant market downturn.
Mixed US Economic Signals
While trade tensions simmer, 'soft' US business confidence indicators, such as the ISM manufacturing PMI, remained in contractionary territory for May. The ISM service sector PMI, particularly its new orders component, turned contractionary for the first time in nearly a year, even as 'prices paid' continued to rise.
In contrast, 'hard' real activity indicators have shown resilience, likely supporting household consumption. Timely job market data, like initial jobless claims, averaged around 235,000 in May, well below the 350,000 level that typically signals recessionary conditions.
Fed Watch: Payrolls and Inflation Key
The upcoming US employment and inflation reports for May are critical market drivers. Consensus estimates predict a slowdown in net job creation to 126,000 in May. A significant miss in the payrolls data, coupled with relatively stable core inflation (consensus at 2.9% year-on-year, 0.3% month-on-month), could increase the likelihood of the Fed resuming rate cuts from July, potentially pushing US equities to new peaks. Conversely, any tariff-driven surge in inflation would delay rate cuts, leading to a short-term consolidation in equity markets, though a significant pullback is not expected due to current bearish investor positioning in US equities.
US Fiscal Policy and Global Currency Outlook
The bank also highlights President Trump's proposed 'Big, beautiful bill' as a potential disruptor for bond markets if passed in its current form, given soaring deficit projections. However, Standard Chartered anticipates some tax incentive cutbacks, noting that elements like tax deductions on R&D, capex, and interest expenses could positively impact US earnings growth.
In currency markets, Standard Chartered has turned bearish on EUR/JPY. Continued disinflation in the Euro area, exacerbated by US tariffs, raises the prospect of further ECB rate cuts in the second half of the year, following this week's 25 basis point reduction to 2.0%. Euro area core inflation recently hit a three-year low of 2.3%. Meanwhile, the Japanese Yen (JPY) is expected to appreciate amid global growth uncertainty, with the Bank of Japan likely to hike rates further as inflation consistently exceeds its 2% target. Related