S&P 500 Just Off Record High as Trump Headlines and FOMC Policy Readily At Hand

S&P 500 Just Off Record High as Trump Headlines and FOMC Policy Readily At Hand

It is headline drama versus the seemingly inevitable gravitational pull of seasonal complacency fighting for the market’s path.

 

Talking Points:

• Record highs and a collapse in volatility/fear belie conditions and themes that can cause unforeseen problems
• The docket is thinner this week that previous runs, but the China trade balance will hit trade wars and US CPI FOMC policy directly
• US consumer confidence cannot be forgotten for its importance in driving a principal growth engine…for the world

A Calm and Proximity to Record Highs Despite Floating Threats

It is headline drama versus the seemingly inevitable gravitational pull of seasonal complacency fighting for the market’s path. It is difficult to miss the constant barrage of borderline hysteria-laced updates we receive around trade, growth, debt, policy and confidence. Yet, despite the frenetic tenor of the news day-to-day, there remains a steady firming in most traditional risk-oriented assets while implied (expected) volatility measures deflate as if the horizon is clear and seasonal norms is the most logical path forward. I am never an advocate of complacency, and it takes a considerable backdrop of overlapping factors for me to even indulge; but the proximity of record highs on benchmarks like the S&P 500 and the accessibility of a cadre of systemic risks leaves me particularly wary of expecting a low-risk climb towards record highs.

Table of Relative Market Trends and Volatility

Source: John Kicklighter

 

If we have already covered much of the peak trade war discount, the burden shifts to a convincingly productive fundamental outlook rather than a mere opportunity take advantage of a measured discount. As liquidity and volume thin to abide the expectations associated with summer trade, conditions are actually more conductive to bouts of shock that may originate from unforeseen headlines relating to systemically important yet actively harried themes. A sudden deterioration in trade, growth, sentiment or yield could touch off an avalanche of barely reserved concern; and there is plenty of scheduled event risk to potentially throw sparts – not to mention the ever ominous headlines.

Calendar of Top Global Macro Event Risk

Source: John Kicklighter

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Gauging the After Effects of an Ongoing Trade War

As an overview of the global macro docket for the coming week, there are notably fewer top level events on tap that would normally carry the weight that could significantly shift targeted local markets – much less the world’s financial tides. That may reassure as to a lower threat profile, it can also concentrate attention rather than split priority on what truly matters and thereby soften the blow of significant shortfalls in one measure or another. Among the more important updates due this week, we have the Chines trade balance for May due at the beginning of the week, Monday at 3:00 GMT.

There is a deep line of skepticism in the straightforward precision of this important data by Western observers, but there is no other measure from which we can gain a baseline view. How significant was period of active and escalating tariffs between the US and China? Were the detrimental effects still being felt even after the armistice; and, if so, what does that mean for the world’s second largest economy – which was already struggling with refiring its engine of growth – moving forward?

Chart of USDCNY and US-China Trade Balance Differential (Weekly)

Source: TradingView

 

US CPI Will Not Likely Provide the Outcome President Trump Wants

Through the middle of the week, perhaps the most recognizable top event will tap into an active interest and concern from traders and the White House. The US consumer price index (CPI) for May is due for release Wednesday at 12:30 GMT. While it isn’t the Federal Reserve’s preferred measure of inflation, it is the market’s favorite; and they end up dictating market movement. With President Trump chastising Chairman Powell and crew once again this past week for not lowering the benchmark rate – notably with comparison to the ECB and for the stated purpose of saving the US on interest cost on its large deficit – this will be a charge for headlines at a minimum.

Sans a significant moderation in core annual inflation (well above the 2.0 percent target threshold in last month’s reading) and a meaningful dip below the target level in the headline figure (it was 2.3 percent in April and is expected to step up to 2.6 percent), there is almost no pressure for the Fed to active ‘preemptively’ for more cuts. They remain concerned about inflation potential ahead, employment remains exceptionally robust via the BLS jobless statistics and capital markets demonstrate a firm confidence. What would be their hurry?

Chart of FOMC Benchmark Rate, US Core CPI and US Jobless Rate (Inverted)

Source: TradingViews, BLS

 

US Consumer Confidence Can Touch a Raw Nerve with Fundamental Watchers

Sentiment in US markets is unmistakably firm, but the confidence level of the country’s consumer is a lot more uncertain. The April reading from the University of Michigan sentiment survey, a leading measure of confidence from the largest aggregate engine of growth in the world – much less the US – dropped significantly to levels competing with pandemic lows and a multi-decade lower bound beyond that. When the Conference Board’s own April reading affirmed the pain with its own comparable extremes in outright concern just a few weeks later, a beacon of macro concern was floated out to the market. These readings can still draw an effort to explain the pain away.  

Perhaps this is a reflection of concern related to trade wars that were still in full swing during the survey period. Then again, the trajectory has not been exactly a straight road towards systemic improvement since that bout of indigestion. If this figure cross the wires with an equally – much less, worse – troubled reflection, it could unsettle the market’s preference to default to seasonality. A Friday release could cap the ability to build serious momentum, but that wouldn’t be much of a silver lining if fear were to rear its head.

Chart of DXY Dollar Index and Implied FOMC Cuts in 2025 (Daily)

Source: TradingView, CME

 

 

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--- Written by John Kicklighter, Global Head of Content