By: John Kicklighter, Head of Market Research
The charge in volatility after the reapplication of reciprocal tariffs and the NFP revisions dropped sharply this past week. Is the market charged enough to translate top event risk into heavy market movement?
The global macro calendar will increase from week to week, but the backdrop doesn’t offer a clear reading on a distinct fundamental theme and recent pressure on key data points (like President Trump’s criticism of the NFPs) could significantly distort the potential impact of the listings that we are looking to take in. Another curb on the transmissibility of event risk into market movement is the general lethargy over the market. There is a distinct ‘risk on’ setting that is complimented by a rapidly deflating backdrop volatility. It looks like the sort of backdrop that extends the summer doldrums to prevent sudden upheaval – all while the opportunities of genuine catalysts to charge enthusiasm that are necessary at these lofty levels grow increasingly scarce.
VIX Volatility Futures and Net Speculative Futures Positioning (Daily)
Source: TradingView.com, CFTC
That can help sustain prevailing trends, but it also substantially blunts volatility. Good for some like the buy-and-hold crowd, but bad for the active traders. Thematically, there is limited existing momentum behind recent matters such as growth forecasts, general monetary policy tide changes or ongoing trade war fronts. There is event risk that can speak to each of those matters, but without an existing momentum to feed into, the calendar items on tap will struggle to charge momentum all on their own.
Calendar of Top Global Macro Event Risk
Source: John Kicklighter
The first big run of meaningful event risk – and arguably the greatest density overall through the whole period – comes on Tuesday. In the morning, we have an expected RBA rate cut (seen reducing the benchmark -25bps), Eurozone economic sentiment, US business confidence and the OPEC monthly report. Those all carry some weight for isolated volatility and even some degree of relevance for the aforementioned dormant themes, but the first truly prominent listing is arguable the US CPI inflation report for July. This is not the Fed’s preferred measure of prices, but it is the public’s favorite reading – and that means it is also President Trump’s focus. The economist consensus forecast for the headline CPI reading is for a tick up to 2.8 percent, while the core annual pace is projected to edge up to 3.0 percent.
Fed Chairman Powell and crew have held off on cutting rates this year supposedly due to concerns that inflation could accelerate even further above its 2 percent target. With this data, the outcome (slower, meeting expectations, faster) will inevitably feed into an interesting narrative. If it is lower/slower, the shift in Fed rhetoric from Fed members recently could reinforce the probability of a September cut. If it is faster, it will draw the ire of the President who has decried the accuracy of labor data – so why not inflation statistics as well? Inline, and the debate will be even more intense.
Chart of US CPI and Jobless Rate (Monthly)
Source: John Kicklighter, Bureau of Labor Statistics, Bureau of Economic Analysis
On the same day as the CPI release, we are also due the expiration of the 90 day truce between the United States and China on the extreme tariff rates they escalated to in a round of reciprocal increases three months back. There has been no major break through reported in negotiations from either side. In fact, there hasn’t been much in the way of stated progress form the parties. That does not bode well as it is the Trump administration’s MO to crow about a ‘big deal’ well in advance when there is one to be had. Historically, a further deferment would be expected when you consider this is dealing with the two largest economies in the world.
The problem we have now, though, is the criticism the President has drawn for reversing course on his measures before the stated capitulation is found from the supposed bad actor trading partner. The ‘TACO’ (Trump Always Chickens Out) accusations have not been as prominent in recent weeks, so it is possible that calmer heads will prevail for a further extension on negotiations. That said, given that the market seems to be assuming status quo via risk trends and even the USDCNH exchange rate, it would be foolhardy not to at least consider a strategy should the unfavorable outcome come to pass.
Chart of USDCNH with Key Trade War Dates (Daily) 
Source: TradingView.com
For a third top-shelf event to keep on the radar, I will be looking all the way through the end of the week to the Friday New York release of the University of Michigan’s US consumer confidence survey. This is the leading consumer sentiment reading and typically generates the most market response. While there are other sentiment surveys through the week – including the US NFIB business optimism figure – it is the US consumer that has the ultimate say on the course of the world’s largest economy and, to an extent, the general bearing for fundamental heading for the globe.
A souring of the headline sentiment figure could bode poorly for plans to spend and it could push the White House to take more aggressive actions on data and institutional upheaval to wrest control of unfavorable perceptions. Further, the components of the survey can tap into even more incisive considerations like inflation and policies. The ‘short coming’ of this influential report is its late release. While it is due in the morning hours of the US session, it is at the twilight of the global session’s liquidity and precedes the weekend. If there is a strong impact on market sentiment from the update, it will have to prove its sway over trend into the following week.
Chart of UofM Sentiment and Inflation Expectations, S&P 500 (Monthly) 
Source: TradingView, University of Michigan
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--- Written by John Kicklighter, Global Head of Content
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