The main focus this week will be on Wednesday’s Federal Reserve meeting, with investors on the lookout for clues on how much more, if any, stimulus may be needed. The U.S. calendar also features data on CPI, jobless claims and consumer sentiment.
Investors will continue to monitor the steepening yield curve amid a selloff in U.S. bonds. In the euro zone, European Central Bank head Christine Lagarde will likely offer more insights into last week’s larger than expected increase in its stimulus program. Concerns over Chinese growth could also be on the radar after weak trade data on Sunday. Here’s what you need to know to start your week.
The U.S. central bank’s monetary policy announcement on Wednesday will be the first since April when Fed Chair Jerome Powell said the U.S. economy could feel the weight of the economic shutdown for more than a year. Investors will be keen to hear the Fed’s views on the economic outlook in the wake of Friday’s U.S. employment report which showed that the economy unexpectedly added jobs in May after suffering record losses in the prior month. The report offered the clearest signal yet that the worst of the downturn triggered by the coronavirus crisis is probably over, fueling a rally in stocks and a selloff in Treasuries.
Steepening yield curve
Friday’s U.S. jobs report added fuel to a dramatic sell-off in U.S. government bonds from their recent record highs, pushing the yield curve to its steepest level since March. The steepening — when longer-dated yields rise faster than short-dated ones — signals a brighter growth outlook. But too fast a rise in borrowing costs can strangle the economic recovery. While the Fed could introduce yield-curve control measures to target short-term rates, fund managers say they expect yields will need to rise significantly to justify any intervention in the bulk of the curve. Instead, they are watching for hints that the central bank believes the economic rebound can support the rise in yields.
U.S. economic data
This week’s calendar also features updates on U.S. jobless claims, a key indicator of the health of the economy, along with consumer price inflation and consumer sentiment.
Claims have declined since hitting a record 6.8 million in late March, falling below 2 million last week for the first time since mid-March. The report suggested the worst is over for the labor market, combined with Friday’s nonfarm payrolls report.
Meanwhile, CPI should continue to ease given the lack of demand in the economy, while the University of Michigan’s consumer sentiment index should continue to rise amid the re-openings and rally in stock markets.
Lagarde testimony, euro zone data
On Monday, ECB President Christine Lagarde will testify, via satellite link, before the European Parliament Economic and Monetary Affairs Committee. Lawmakers will have the opportunity to ask questions about the reasons behind the ECB’s larger-than-expected increase in its emergency bond buying stimulus program. On the data front, Germany is to release industrial production data for April on Monday followed by France and the wider euro zone later in the week. Germany, the euro area’s largest economy, is facing the prospect of its deepest recession since World War Two as the coronavirus pandemic takes its toll, even though lockdown restrictions are now being eased.
China growth fears
Chinese trade data on Sunday indicated that global demand for goods produced by the world’s second-largest economy remains weak. Chinese exports contracted in May as global coronavirus lockdowns continued to devastate demand, while a sharper-than-expected fall in imports pointed to mounting pressure on manufacturers as global growth stalls. The data could reinforce expectations that China may not have any growth this year. Investors will be watching to see how bullish stock markets will react as the unstoppable force of Chinese production runs into an impregnable global downturn.