While the G-20 summit starting this Friday is certainly the week's top market-moving event as investors and pundits will be closely watching the outcome of the meeting between Trump and Xi for any signs of a thaw in diplomatic relations and trade war rhetoric, just as important will be speeches by the Fed chair Powell and vice-Chair Clarida over the next two days for some much needed guidance on the Fed's next steps.
The reason: as the chart below shows is that following the recent slump in the market, coupled with rising fears of an economic slowdown in the US next year, traders have sharply cut their expectations for Fed rate hikes in 2019, and from as high as 60bps two months ago, markets now price in just 29bps of rate hikes in the coming year, or in other words just over "one and done", a sharp disconnect with the Fed's own dot plot which still anticipates no less than 3 rate hikes next year. In fact, if the Fed does not "guide down" to the market, odds are that risk assets are set for another major negative surprise, pushing stocks even lower.
This is the quandary discussed by SocGen's Albert Edwards in his latest note, in which he accurately observes that investors are beginning to believe that the Fed is nearing the end of its metronomic tightening cycle....MUCH MORE
As shown above, Edwards notes that "market confidence that the Fed will deliver the promised three rate hikes next year is evaporating and recent CFTC data confirms that speculators have begun to unwind their gargantuan short Treasury positions. And yet, despite wild gyrations in the oil price, US CPI inflation expectations remain well anchored around 2% mirroring subdued actual inflation....