By: John Kicklighter, Head of Market Research
The steadfast climb in risk appetite seemed to break this past week between the reapplication of reciprocal tariffs, an NFP miss and threatening posturing between the US and Russia. Is this just an overdue pullback or a genuine turn?
Talking Points:
We seem to be at an important cross roads for risk appetite. With last week’s broad and intense correction in sentiment-oriented measures, there seems an elevated chance that we could genuinely turn markets off of their multi-month bullish trend. However, it isn’t easy to fully reverse a trend – particularly the bullish oriented – and brief corrections in larger patterns are common. What would determine whether we follow the course of a temporary pullback or full commitment deleveraging?
Scale of Risk Aversion Intensity
Source: John Kicklighter
Commitment to a systemic fundamental theme – bullish or bearish – represents the most capable fuel and scheduled event risk provides the sparks. While we have trade wars back in the forefront, Fed rate expectations have stirred and US-Russian relations have taken a worrying turn; these are not naturally progressive matters on their own. What’s more, the top data on tap isn’t obvious fodder for scalable fear. It will be important to evaluate whether volatility can catalyze or sustain trend.
Calendar of Top Global Macro Event Risk 
Source: John Kicklighter
As far as the quality of the calendar ahead, there is a notable reduction in the density of top listings and varied themes as compared to what we navigated last week. On the one hand, that can mean less charge to short-term volatility from surprise outcomes; but it can also ‘help’ trend development in as much as expectations for subsequent event risk is less likely to blunt the reaction to preceding releases. That said, between the most charged theme and the most capable scheduled event on the docket, my top focus this week will be the ISM service sector activity report for July.
This is an important and timely measure of economic activity for the United States, but it is made more interesting with the context of the market’s reaction to last week’s nonfarm payrolls. Those still positive, the concern in the miss and hefty June revision seems to have the market unnerved on growth (via the S&P 500) and expected rate cuts (via the Dollar). Should this figure struggle, it could add to the concern. In particular, I will be watching the employment component with a secondary interest in the inflation element.
Chart ISM Service Sector PMI Prices and Jobs Components with S&P 500 (Monthly)
Source: John Kicklighter, ISM
Another active theme of interest this week will be the market’s assessment of its feelings on trade wars. It managed to ignore the threats made by the US – and even some active tariffs – but the application of negotiated and punitive rates at the end of this past week was the dawning of actual economic impact. There are a range of trade figures on tap, which naturally will reflect on a period before these new rates were in place.
Nevertheless, they will represent a baseline for the health of trade before the barriers were raised even further. I will be watching trade data from countries like China, but I believe the simultaneous report of US and Canadian figures on Tuesday will be particularly charged. Notably, the two countries did not come to an agreement before the deadline, and the war of words between Trump and Carney is turning increasingly into an economic pain.
Chart of US and Canada Balance of Trade (Monthly)
Source: John Kicklighter, TradingView
A third theme worth of attention more for isolated regional and asset specific volatility will be monetary policy. Even though the expectations for Fed rate cuts has shot up through end of last week, we don’t have another FOMC rate decision until September. Nevertheless, that outlook will have an impact on the intentions of other major central bank peers, two of which are worth monitoring this week: the Bank of England and Central Bank of Mexico.
The former is expected to lower its benchmark rate another -25 basis points to 4.00 percent following the last easing in May. This would keep the second place major authority at a discount to the Fed. As for the Mexican central bank, an extension on negotiations around the end tariff rate keeps Mexico and the United States’s economic relationship up in the air. It is under this uncertainty that the country’s monetary policy authority is expected to cut its own key rate by -50 basis points. Will that help spur growth in the face of throttled exports to the US?
Chart of Major Central Bank Interest Rates (Monthly)
Source: John Kicklighter, TradingView
What are the major events and indicators on tap for the global economy that could charge volatility in markets and reshape deeper fundamental themes? Sign up for the updated Global Macro Calendar updated each week with a two week look ahead of the top events!
--- Written by John Kicklighter, Global Head of Content
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