Week Ahead: Trump-Xi Summit, Fed speaks & PMI data
Two hikes (Fed, BoJ) and a hold (BoE)
Last week, U.S. stocks ended broadly flat while the USD jumped more than 1%.
This move came as the Federal Reserve hiked interest rates by 25 basis points, in line with expectations, to 3.75%-4%. However, policymakers also signalled that there could be at least one more rate hike this year, with four of 18 policymakers signalling two further rate increases.
Despite an initial drop in stocks and rise in yields, this quickly reversed, including an easing in 10-year Treasury yields, suggesting investors interpreted the move as the Fed taking inflation seriously and improving its credibility.
Other central bank meetings included the BoJ, which also hiked rates by 25 basis points, in line with expectations, to 1.25%. However, the 7-2 vote was less hawkish than expected, and Governor Ueda failed to convince the market that the central bank was serious about aggressively tightening monetary policy.
A combination of the more hawkish Fed and the less convincing BoJ saw USD/JPY briefly spike to 158, up over 2% across the week.
Meanwhile, the BoE left rates unchanged for a sixth straight meeting, a notable outlier compared with other major central banks, as second-round inflation effects from higher energy prices have yet to show up in the data. GBP/USD fell sharply on the BoE-Fed divergence.
Fed speakers and PMI data
Heading into the new week, the Fed's decision will remain very much in focus as policymakers hit the airwaves, including Chicago Fed President Austan Goolsbee on Monday and New York Fed President John Williams on Tuesday.
Should speakers reiterate concerns over high inflation and the upside risks from the Middle East conflict, the market is likely to maintain hawkish Fed expectations. This will be even more so the case if Wednesday's S&P flash PMIs for September support the view that the U.S. economy is holding up well.
Eurozone and UK flash PMIs for September will also be released on Wednesday.
This data comes after the ECB hiked rates on September 10 by 25 basis points amid renewed inflationary pressures and as energy prices are expected to continue rising.
The market is pricing in three 25-basis-point rate hikes by the end of next year. However, with growth in the region still relatively fragile, aggressive hikes may be difficult to achieve. Strong PMI data could help ease those concerns and provide support for the euro, which struggles around a 6-week low.
Trump-Xi meeting
Perhaps the key focus this week will be on Thursday, when President Trump is scheduled to meet Chinese President Xi Jinping at the White House. The two will have plenty to discuss, including the Middle East conflict, trade, tariffs, rare earth exports and AI.
The meeting comes as debate over the pace of AI development intensifies. Anthropic CEO Dario Amodei has called for a slower approach to the development of increasingly powerful AI models, while the issue has become increasingly intertwined with U.S.-China competition over technology.
For the U.S. and China, AI presents a difficult balance: both sides have an interest in managing the risks associated with increasingly powerful technology, while simultaneously competing to lead the sector.
Trade will be another key focus. The U.S.-China trade and technology truce is due to expire in November, with Washington seeking a shorter extension and Beijing pushing for a longer arrangement. Discussions are also expected to cover tariffs, rare earth exports and market access.
For investors, the key question is whether the summit can extend the relative calm in U.S.-China trade relations. Any progress on tariffs or rare earths could support risk appetite, while renewed tensions could quickly put pressure on risk assets such as equities and the tech heavy Nasdaq.
