Trump and Xi Call in Focus

STOCK INDEX FUTURES

Stock index futures moved higher ahead of a call between President’s Trump and Xi, as investors look for any signs of a break in the US-China trade war. No new economic data is out this morning, leaving the call between the two leaders in focus after an eventful week which saw the Fed cut rates and a $5 billion investment into Intel from Nvidia. Trump has set high expectations for the outcome of the call, describing a TikTok deal as all but completed and stressing he is hopeful the two deadlocked countries can negotiate over trade. Trump has also said the US may end up extending its trade truce once again.

Analysts are split on the Fed’s messaging, with interpretations ranging from dovish to neutral. However, framing the rate cut as risk management, combined with a dot plot showing limited support for further cuts and Powell’s emphasis on persistent inflation risks, suggests a more hawkish stance than markets anticipated.

CURRENCY FUTURES

The USD index continued its advance on Friday, with no new data out other than a call between President Trump and Xi, markets will continue to digest the Fed’s rate cut and comments from Chair Powell. Powell warned that inflation risks remain, alongside elevated risks to employment. Powell characterized the cut as a risk management cut in response to a weakening labor market, but also noted that the central bank did not need to rush easing. The Fed’s updated dot plot also shows the committee is expecting the Fed Funds rate to land at 3.6% by year end (median response value). This is one more rate cut than was projected back in June, although there was a wide dispersion of forecasts signaling that a high degree of uncertainty remains.

Euro futures are lower while the dollar firmed as markets continue to digest the Fed’s rate cut. German PPI figures came in weaker-than-expected with PPI inflation falling 0.5% in August, well below forecasts of a 0.1% drop. In Europe, the ECB left rates unchanged for a second consecutive meeting last week, suggesting its rate-cutting cycle may be over. Executive board member Isabel Schnabel urged policymakers to “keep a steady hand,” citing risks from tariffs, services inflation, food prices, and fiscal policy. Euro area inflation was revised down to 2.0% from 2.1%.

British pound are lower after fresh data showed that public sector borrowing between April and August totaled 83.8 billion pounds ($113.39 billion), 11.4 billion pounds more than forecast by the Office for Budget Responsibility earlier this year. The increase in borrowing compounds the problem finance minister Rachel Reeves faces with her November budget, in which she had already been expected to announce new tax rises to stay on track to meet her fiscal rules and avoid unsettling financial markets. The BoE left interest rates unchanged on Thursday as expected and opted to reduce the pace of its government bond sales to minimize the impact on the more volatile longer-dated section of the market. With inflation running at nearly double the central bank’s 2% target, the BoE has only limited scope to lower rates much more to help shore up the economy, where evidence is mounting of weakness in the labor market. Elsewhere on the data front, retail sales rose in August, supported by good weather, while consumer confidence edged lower.

Japanese yen futures are lower after the Bank of Japan left its policy rate steady at 0.5%, where it has been since its January rate increase, as it assesses US tariffs and domestic political uncertainty. The central bank said the economy is recovering moderately but pointed to areas of weakness and warned of risks from global trade policies. It also announced a unanimous decision to begin selling its ETF and J-REIT holdings, which sent stocks lower in the country. Two BoJ policy board members dissented from Friday’s decision to hold, signaling they believe the central bank is ready for another increase. Governor Kazuo Ueda said the  bank would be looking at how much the downside risks from US tariffs will affect the Japanese economy and prices, in regards to when the bank may hike rates again. Japan’s consumer prices rose at a slower pace in August but remained well above the central bank’s 2% target, helping the case for an interest-rate increase. Consumer inflation, excluding volatile fresh food prices, increased 2.7% in August from a year earlier, compared with July’s 3.1% rise, in line with expectations.

Australian dollar futures continued lower after employment figures showed the economy lost over five-thousand jobs in August against expectations of a 21,500 gain, lending support for the Reserve Bank of Australia to cut rates later this year. The net decrease in employment was driven by a sharp drop of 40,900 full-time positions. The unemployment rate held steady at 4.2% while the participation rate edged lower to 66.8%, signaling a gradually softening labor market. Despite the weak print, markets imply only a 20% chance of a rate cut by the Reserve Bank of Australia at the September 30 meeting, with expectations rising to 70% for November. The Q3 inflation print due in October will be pivotal, with the central bank noting that monthly figures are less reliable. Investors also await next week’s PMI data to gauge the country’s economic health.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve, adding to an increase of global yields on Thursday. No new economic data out today will leave markets focused on the outcome of a call between Trump and Xi, while  Mary Daly, President of the Federal Reserve Bank of San Francisco delivers a speech at AI Implications for Workforce Development and Economic Mobility event.

Chair Powell said the Fed is in a “meeting-by-meeting situation” regarding the outlook for interest rates and characterized the cut as a risk management cut rather than the start of a new easing cycle. Powell also added that the Fed is well positioned to move on any economic developments, but the committee felt cutting rates was appropriate given the downside risks to the labor market. Powell also noted that “no risk-free path” is available for the Fed. Six members of the FOMC projected no more interest rate cuts by the end of the year, while one member expects the central bank to hike rates.

The Summary of Economic Projections showed that committee members see GDP growing 0.2% over the previous projection, while unemployment and inflation remain unchanged, while also expecting two more quarter-point reductions at the remaining two policy meetings. The SEP, alongside comments from Powell, sends mixed signals from the bank, highlighting a high degree of uncertainty about future economic conditions. The dot plot showed policymakers have little to no agreement on how the bank should react to current economic conditions, despite a consensus 11-1 vote to cut rates by 25 bps.

The spread between the two- and 10-year yields rose to 55.3 bps from 53.8 on Thursday.

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