Tariffs and Fed Pressure Are Setting Up a Volatile Week

Tariffs and Fed Pressure Are Setting Up a Volatile Week

We are coming out of the depths of the seasonal summer doldrums and facing one of the most intense macro event laden weeks of the year. Will GDP readings, a FOMC rate decision, Mag 7 earnings and expected tariff deadline trigger a volatility event?

Talking Points:

• Key market benchmarks are pushing record highs and an overwhelming amount of event risk is on tap
• President Trump’s pressure on Fed Chairman Powell and the central bank means a ‘no change’ FOMC decision is still a market moving outcome
• Mag 7 earnings will stir the top movers but the end-of-week deadline for tariff delays will always draw our attention forward

An Overwhelming Amount of Event Risk and Markets at a Record High

Table of Relative Trend and Volatility Levels of Different Markets

Source: John Kicklighter 

 

Pair this with the general bearing of the capital markets at or near record highs, and the spectrum for market scenarios becomes far more complicated. Translating ‘better than expected’ outcomes from key releases into a meaningful support of the already elevated mood will prove substantially more difficult. Should critical fractures arise in any of these important nodes, a committed turn would also prove difficult to establish with expectations turning to ‘hope’ for the next update – though the potential for meaningful momentum likely skews more towards risk aversion than risk appetite, given that fear is the more powerful emotion compared to greed.

Calendar of Top Global Macro Event Risk

 

Source: John Kicklighter

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No Change from the Fed is a Market-Moving Outcome

When wading through the dozens upon dozens of high importance economic events and data points scheduled through this week, it is important to consider what listings hold the greatest potential to charge a dominant fundamental theme and what has some measure of clearance such that it won’t see its impact overridden by the proximate release of another top event. Through the first half of the week, it is worth taking note of recent trade reports (US, Mexico, Hong Kong), the IMF’s World Economic Update, the US consumer confidence survey from the Conference Board and Q2 GDP figures. However, these indicators are likely too far from their respective core fundamental tributaries to override the anticipation of what is further ahead. The first singularly-capable event on deck is likely the FOMC rate decision Wednesday at 18:00 GMT.

Normally, this wouldn’t be a particularly noteworthy policy gathering for Chairman Powell and his fellow central bankers as the market heavily (96% probability according to Fed Fund futures) expects no change to the benchmark rate. Furthermore, this isn’t one of the ‘quarterly’ meetings where they update their rate (and growth, inflation and labor) forecasts. That said, a ‘no change’ from the Fed in this environment is meaningful. US President Donald Trump has made a remarkably overt effort to pressure Powell to cut rates dramatically, including the awkward televised visit to the Federal Reserve building to review ongoing renovations. When it is clear that the central banker isn’t yielding to the pleas, threats and shamming; what will the White House do next?

FOMC Policy Meeting Scenario Table

 

Source: John Kicklighter 

Microsoft, Apple and Meta Earnings Hold Greater Sway

The market reaction to the Fed decision will likely not be fully realized until President Trump starts to comment via his press conferences, on his social accounts or via his team (Press Secretary, Treasury Secretary, Economic Advisor, etc). That takes a distinctly timed event and turns it into an anxiety-charged headline watch. Depending on how the headlines evolve and whether the market catches traction in the waning hours of the US trading session, competition will come soon after in the form of the ‘Magnificent 7’ earnings. We have already had two of these peak market cap tech stocks report last week – Tesla and Google – but their influence over the broader market (in this case, Nasdaq 100 as a benchmark) proved uneven.

Notably, Tesla has fallen out from the performance of the larger group and Alphabet (parent of Google) offered favorable figures backed by the common refrain of ‘AI”. The offerings on Wednesday are the second and sixth largest market cap companies: Microsoft and Meta respectively. Between the two, the correlation MSFT has generated relative to the NDQ has been the strongest among its peers. Spreading the fundamental influence out a bit, Apple will release its corporate report card after the close on Thursday. AAPL’s correlation to the index is strong as well; but we should really look for the collective influence of earnings from these large tech companies rather than look for a particular outlier.

Chart of Nasdaq 100 with Microsoft, Meta and Apple Correlations (Daily)

Source: John Kicklighter, TradingView 

At the End of the Week: D-Day for Tariffs

For the final highlight to focus on over the coming week, I will set aside the likes of an expected Bank of Japan rate hike and even the ever-popular monthly US nonfarm payrolls to focus on the August 1st deadline for the delayed US reciprocal tariff rates to go back into effect. The 90 day deferment that President Trump issued back in early April after the market plunged following the announcement of the ‘Liberation Day’ wave technically fell on July 9th, but an additional extension was added. The fact that this deadline falls on a Friday before markets drain for the weekend can inadvertently add liquidity problems to a complex and high-risk fundamental trouble. As for possible outcomes, there are three general paths this event is likely to follow: another deferment; deals for everyone or a varying range of onerous tariffs for some with deals for others.

There is a growing anticipation in the market that the worst of the threats will continuously be pushed back (with the President’s detractor’s taking to calling it a TACO policy) to avoid the economic damage it could inflict on Americans as well; but the administration no doubt sees the waning effects of threats alone in negotiations. To simply allow a low level tariff across board as a ‘deal’ would similarly seem to conflict with the aim of the President’s policy in the first place. It would seem that the most likely scenario is that those that have not secured a negotiated rate with the United States will see the government raise the more onerous placesetter and negotiations continue under more difficult circumstances. Even if that doesn’t trigger a broad risk aversion immediately after it takes effect, the consistent erosion it represents will draw on the bull trend consistently moving forward.

Table of US Trade, Status of Negotiations and Proposed Tariff Rate

  

Source: John Kicklighter, USTR, White House 

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