Five fundamentals for the week: Markets focus on trade and US inflation figures

Will the US and China find a way to resolve trade issues? Will the US government reopen? These issues weigh on investors’ minds, but at least some economic data is coming this week. 

1) US-China trade tensions center on rare earths

US President Donald Trump and his Chinese counterpart Xi Jinping aim to meet in next week’s APEC Summit in South Korea – but that can happen only if they agree to lower trade tensions. Talks between the world’s two largest economies continue, but so far, they have only slapped more measures, such as shipping fees.

The main topic of contention is Beijing’s new export controls on rare earths. These minerals are used in electric vehicles and other industries, and China controls some 70% of output. 

Investors are sure that Trump is sensitive to Stock market jitters, that he’ll eventually back down – aka the TACO (Trump Always Chickens Out) trade. According to The Wall Street Journal, the Chinese are also convinced that the US will wink first. 

However, there could be a miscalculation resulting in punitive tariffs of 100%, as the Commander-in-Chief mused at some point. 

An announcement of progress and a meeting between the two leaders would boost Stocks, while a breakdown in talks would send Gold and the US Dollar (USD) soaring.

2 US government shutdown enters fourth week, causing pain

Lawmakers in Washington are in no rush to agree on a way to reopen the government. That means more people are going without paychecks, the suspension of some federal services and delays in the release of almost all economic data. 

This uncertainty is driving some of the heightened market volatility, and it could get worse the longer the shutdown continues.

Any news of a bipartisan effort to reopen the government would support Equities, while a lack of talks would keep the US Dollar and Gold bid.

3) UK CPI has probably remained stubbornly high

Wednesday, 6:00 GMT. Most of Britain’s high inflation is gone, but the last mile to price rises down toward 2% YoY is the hardest. The UK is expected to report an increase in the core Consumer Price Index (CPI) in September, which stood at 3.6% in the previous month, and it is unlikely to have fallen. That would cool expectations for interest rate cuts by the Bank of England (BoE) at a time when unemployment is edging up.

The Sterling Pound (GBP) would rise on a higher inflation read and slide if price rises ease. The figure is watched beyond the UK as well.

4) US CPI is critical ahead of the rate decision 

Friday, 12:30 GMT. Workers at the US Bureau of Labor Statistics (BLS) have been recalled to work to compile the CPI report, despite the government shutdown. While the Federal Reserve (Fed) is currently more focused on its employment mandate, inflation is also critical. The figures are published less than a week before the central bank’s all-important meeting.

The Fed eyes core CPI, which excludes volatile energy and food costs, and that is expected to have risen by 0.3% MoM in September, at the same pace as in August. On an annual basis, core CPI is projected to have risen by 3.1% YoY, also a repeat of the previous month.

Hotter inflation would boost the US Dollar while hurting Gold and Stocks. A deceleration in price rises would have the opposite effect. 

5) S&P Global PMIs are of higher importance with the absence of most government data

Friday, 13:45 GMT. Surveys are considered “soft data” because they are based on expectations rather than what actually happened. In addition, S&P Global Purchasing Managers’ Indexes (PMIs) are not as impactful as those published by the Institute for Supply Management (ISM). Nevertheless, the figures are for the current month of October and thus were released early.

The Services PMI stood at 54.2 in September, reflecting healthy growth in America’s largest sector. The Manufacturing PMI hit 52, also above the 50-point threshold that separates expansion from contraction.

Investors will be calmer ahead of the weekend if both figures remain around current levels or higher. A slide toward 50 would hurt Stocks and boost Gold. 

Final thoughts

Market volatility has risen sharply since Sino-American tensions flared, and Friday’s US CPI release could prove explosive. Trade with care.