Numbers Versus Nomenclature: Clouded Data Leaves Risk Perceptions to Influence Markets

As the list of risks facing the capital markets grows by the day and is categorized accordingly, the numbers still refuse to tell a decided story. The US Fed said as much at its latest meeting, expressing patience for the next move in policy rates as it noted the country’s economy appears to currently be in decent shape, given low unemployment and resilient demand.

Distortions in US economic performance are adding to the central bank's proclivity to assume a wait-and-see posture, with elevated imports, for example, skewing GDP and sentiment distancing itself from spending. Looking past the obfuscations, the US Fed believes the risk of rising unemployment and higher inflation is elevated but noted there is considerable uncertainty due to negotiations for potential trade deals and the changing landscape for tariffs.

In managing its dual mandate of employment and inflation, the US Fed, and the Bank of Canada for that matter, will likely look to abate the latter before focus is set on the former. Hence, no surprise futures are now pricing in a first cut by the US Fed in September instead of July.

Bonds took the Fed’s non-move this week in stride, with little change in US 10s as they continue to bounce around inside their current range (a topic I opined on last week: https://www.linkedin.com/posts/jason-parker-cfa-fcsi-510a3253_bonds-markets-tariffs-activity-7324094018785595393-q1Je?utm_source=share&utm_medium=member_desktop&rcm=ACoAAAtda1wBYtWPK_GzAm-Hxz4K_UHdObgxzzc). Bond yields await clearer economic numbers to determine their fate; and in that regard, we will get a hint into the future direction of inflation next week with US CPI numbers set for release.

It is too early for a definitive inflation picture in the US since tariffs will have had minimal impact on the latest data. Having said that, any material increase to inflation numbers printed next week will portend an uglier path ahead, while a lower-than-expected result will likely be taken with a grain of salt given the higher prices that are about to hit US consumers.

Regarding the building nomenclature of risks confronting investors, top of mind has to be the fallout from the trade war started by the Trump administration. Corporate earnings season was replete with discussions from senior management teams about uncertainty for financial and operating performance going forward, with forecasts being withdrawn in some cases and capex being put on the shelf in many instances. An agreed consensus was lower sales and higher prices in the days ahead.

The cautious tone set in corporate earnings season foreshadows building economic risks. Interestingly, however, risk markets seem to be myopically focussed on the lower recalibration of US tariffs and are not fully pricing in the emerging reality of slowing economic conditions, falling prey to something of a bait and switch tactic by the Trump administration – tariffs will be very penalizing; ok now they are less penalizing, so forget about the economic and geopolitical ramifications.

Speaking of geopolitics, the reconfiguration of the global order is being exacerbated by the fact the trade war started by the US is spreading that country’s leadership resources thin. Conflagration still rages in Ukraine (to no one’s surprise, except perhaps the Trump administration), while new hotspots percolate and are aggravated by a lack of international leadership, such as the current tumult between India and Pakistan.

An internationally ineffectual US foreign policy heightens risk in every region, something a renaming of bodies of water cannot placate. We can also expect authoritarian/strongman political structures to assert and expand their presence throughout the globe, and liberal democratic principles to be put on their backheels.

In the next week, the markets will likely continue to heal from their shellacking in April, unless there is a blowout from US inflation data or circumstances worsen materially between India and Pakistan. Expect no real trade deals, only window dressing and soundbites, something I spoke about a few weeks back in my article entitled: Red Herrings Digest Better When Well-Read https://www.linkedin.com/posts/jason-parker-cfa-fcsi-510a3253_fixedincome-corporatebonds-tariffs-activity-7308871670218268672-Z9Di?utm_source=share&utm_medium=member_desktop&rcm=ACoAAAtda1wBYtWPK_GzAm-Hxz4K_UHdObgxzzc