Big week ahead – The Daily Tearsheet

Vital Statistics:

Stocks are higher this morning after the EU and the Trump Administration reached a trade deal. Bonds and MBS are flat.

We have a lot going on this week, with the FOMC decision due on Wednesday, the PCE Price Index on Thursday and the jobs report on Friday. The Street doesn’t see much chance of a rate cut at the FOMC meeting, although the statement will be parsed to see if the Fed sets the table for a September cut.

We will also get earnings from Apple, Microsoft and Amazon.

Yesterday, the Trump Administration announced that it has reached a deal with the EU on tariffs. The US will impose a 15% tariff on most EU goods, which was half the amount threatened. “A 15% tariff on European goods, forced purchases of U.S. energy and military equipment and zero tariff retaliation by Europe, that’s not negotiation, that’s the art of the deal,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities. “A big win for the U.S.”

“Putting it all together, what we’ve seen with Japan, with the EU, with the talks which are due to be held in Stockholm between the U.S. and China, it really does negate the risk of a prolonged trade war,” said Tony Sycamore, market analyst at IG.

The EU also agreed to purchase about $750 billion worth of US energy and to invest an additional $600 billion worth of investments in the US.

Donald Trump had a meeting with Jerome Powell and came away with the impression the Fed is ready to start moving rates lower. “I believe that the chairman is going to do the right thing,” Trump told reporters then. “I mean, it may be a little too late, as the expression goes, but I believe he’s going to do the right thing.”

Given the deal with the EU, will we see a change in posture from the Fed regarding its too-tight monetary policy? If PCE inflation continues to be in the mid-to-high 2% range, Powell’s stance becomes more and more untenable.

Treasury Secretary Scott Bessent is going to wait for rates to fall before increasing longer-term government bond issuance. The Quarterly Refunding Announcement will be issued on Wednesday, which will update the mix of short-term and long-term debt being issued.

It will be interesting to see what the long end does when the Fed does start cutting rates. The yield curve is more or less flat, which means the long end has already baked in a few rate cuts, or the long end thinks the economy is starting to weaken.

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