Top of the Morning: The week in review and preview
The desk interprets the recent US-China trade talks and inflation data as pivotal moments for market sentiment, asserting that muted market responses suggest investor skepticism regarding the sustainability of progress. Per the full note source, while initial conversations between the US and China showed promise with a temporary tariff reduction and smoother rare earth export approvals, subsequent claims of reneging by either side have reignited uncertainty. Furthermore, the latest US inflation data continues to provide a complex backdrop for traders anticipating potential shifts in the Federal Reserve's approach to interest rates in the months ahead.
What the desk is arguing
The desk takes the stance that ongoing US-China trade dialogues are critical to the macroeconomic landscape, especially as inflation data begins to circulate heavily in the markets. Recent meetings aimed at de-escalating trade tensions resulted in a temporary agreement on tariffs, yet doubts remain as accusations against China's commitment to terms surfaced shortly thereafter. Per the full note source, despite seemingly constructive negotiations, muted market reactions indicate a wider skepticism towards the prospect of significant bilateral improvements.
Furthermore, the US inflation data that was referenced may alter the trajectory of the Federal Reserve's policy decisions moving forward, and markets are keenly observing how this will affect currency pairs involved in international trade. The reference to tariffs being lowered for a finite period underscores the delicate balance in trade relations, which could heavily influence investor positioning in equity markets and beyond.
This cautious outlook creates an opportunity for a reevaluation of positions as market participants hedge against potential volatility stemming from any reversals in negotiations or unexpected inflation outcomes.
Where it sits in our coverage
Currently, our consensus target for equity performance is around 1.075, with a range from 1.04 to 1.12. Notable targets from other firms include: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
This view aligns somewhat with jpmorgan, indicating a more optimistic alignment with temporary trade progress, while the outlook diverges from bofa, which remains cautious amidst potentially rising tensions or inflation. The desk's position seems to sit at the upper bound of this spectrum, reflecting a more positive sentiment.
How other firms see it
Firms such as jpmorgan show alignment with a generally optimistic view on equities, affirming faith in gradual economic recovery through positive trade developments. On the contrary, bofa holds a more pessimistic stance, highlighting potential downside risks linked to inflation and trade stability.
Traders should consider the trajectory of the USD/CNY pairing moving forward, as it may closely mirror the effectiveness of US economic data and the outcome of trade talks. Keeping an eye on US inflation indicators will also be vital for making informed decisions in the coming weeks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-China trade talks yield minor progress, yet market reaction remains muted, indicating skepticism.
- 02Recent US inflation data could influence Federal Reserve policy, affecting overall market sentiment.
- 03Current consensus targets reflect a range of optimism and caution among major firms.
- 04Ongoing negotiations and inflation trends are critical to monitoring for FX market participants.
Market implications
Watch for potential shifts around the 1.075 level amidst upcoming economic indicators related to inflation, which could dictate shifts in Fed policy. The USD/CNY currency pair will also be key to observe as trade discussions unfold.
Risks to this view
A reversal could occur if trade tensions escalate again or if inflation figures exceed expectations, prompting a shift in Federal Reserve strategy that could unsettle the current market equilibrium.
Hi everyone, Siobhan Chapman here and welcome to Top of the Morning on the UBS Market Moves podcast channel. It's Friday morning, which means it's time for the Week in Review and Preview conversation, where my guests will recap how markets have performed over the past few sessions and previews you can expect in the week ahead. Joining us for the conversation, I'm glad to welcome back Matthew Tormey, Equity Strategist Americas with the UBS Chief Investment Office.
Matt, welcome. We're happy to have you. Hey, good morning, Siobhan, and great to be back.
So let's get started. Earlier this week, U.S. and Chinese officials met in London to engage in trade negotiations. What was the outcome of those talks and why do you think the market response was fairly muted?
Yeah, that's a great question, Siobhan. So before diving straight into the takeaways and the outcomes from the talks, I think it is important to set the stage and discuss why U.S. and Chinese officials were meeting in London in the first place. So last month, the U.S. and China had met in Geneva, where a few important decision points were made.
So first, both countries agreed to lower tariffs for 90 days while talks continue. A second, rare earth export permits for U.S. customers may see smoother approvals. And then third, there was an understanding that neither side wanted to couple, which in our view was an important development towards avoiding a renewed escalation in trade tensions between the world's two largest economies.
However, in the days following the Geneva meeting, the U.S. claimed China reneged on a promise to release shipments of rare earths, which only increased uncertainty among investors again. So now fast forward to the first week of June when President Trump spoke with President Xi over the phone, which resulted in a second round of trade talks in London this past weekend. Now, what was the outcome of these trade talks?
Well, it does seem like progress was made and it appears the U.S.-China trade truce has been restored, but the lack of details coming out of the meeting may be why the market response was fairly muted. But what we do know is that President Trump said a deal had been done to restore the flow of critical magnets from China and a pledge was made to lift curbs on student visas. Additionally, U.S.
Commerce Secretary Lutnick said that the U.S. would unwind recent curbs on technology as long as niche metals that were essential to U.S. auto and defense firms flowed fast enough. And finally, both countries said a trade framework had been reached and would be taken back to their leaders for approval. So all in all, we do see the outcome of the London meeting as a step in the right direction.
But the path to lasting trade deals is still likely to be bumpy and something we will continue to keep a close eye on. So turning to the macro calendar, we received fresh inflation readings this week. What are your takeaways from the data?
Yes. So we did get a fresh slate of inflation data this week, but did come in cooler than expectations. And while this is a welcome development so far, the tariff impact has been limited.
So we'll still have to keep a close eye on the inflation data in the coming months ahead to get a better sense of the true impact the tariffs may have. Now, if we take a look at the CPI data that did come out on Wednesday, both the headline and core readings came in below consensus on a month over month and year over year basis. And if we dive a bit deeper into the breakdown between goods and services, core services inflation, which does exclude energy, is continuing to trend lower, which is being helped by moderating shelter inflation and is now only slightly above pre-pandemic levels.
And on the core good side, inflation has been gradually trending higher, but still near zero. And then on my comment earlier about the impact of tariffs on the inflation data, consumers have been anticipating tariff driven price increases. But so far, the impact's been limited with one example investors could potentially point to is the two point two percent rise in toy prices.
So taking these latest developments into our thinking, in our view, we do still expect to see more notable price increases in the months ahead as inventories that were built up ahead of the tariff are used up and more of the cost is passed through into retail prices. And eventually by year end, inflation might end up around three point five percent, which is a full percentage point higher than it would have been without the tariffs. With respect to U.S. equities at current levels, what are your thoughts and outlook through the year end?
So on our U.S. equity view, at a high level, we are currently neutral on the asset class, which I do want to emphasize isn't a negative stance, but rather we believe that the risk reward looks pretty balanced at today's levels, because if we look at valuations, the market is above 21 times now and it's been here for the past month. So it appears that investors are already pricing in a substantial de-escalation in trade frictions. Now, in large part, we do hold the mutual view through year end because we believe the economy still needs to adjust to the higher tariff levels that President Trump has put in place.
And as a result, economic data does look poised to soften in the months ahead. And even though we don't think this is a major source of downside risk for U.S. equities, it could be a modest headwind. Now, if we look further out over the next 12 months, we do still believe that the bull market is intact and stocks are likely to end up higher than today's levels because after digesting the tariff impact, we think that the economic data should improve later this year, driven by a pickup in real wage growth, clarity on tax policy, deregulation, and potential Fed rate cuts.
So with all that said, we do expect S&P 500 earnings to grow 4% this year and 8% in 2026. And looking at our S&P 500 price targets, although we aren't expecting much upside from today's levels through year end, we do still have 6% upside to our June 2026 target of 6400. So despite our neutral view, we'd recommend investors maintain a full allocation to U.S. equities.
And then lastly, on positioning, we currently have attractive views on tech, communication services, utilities and health care. Turning to next week, what's taking place that investors should be mindful of? OK, so turning to next week, it's a little bit of a lighter calendar from an earnings and economic perspective, given it's a holiday week, but still some very important data points to stay on top of.
So starting on Monday, we'll receive the June Empire State Manufacturing Index reading, which is still expected to be in negative territory, but improved from the prior month's reading. On Tuesday, the May retail sales data is going to be quite important, with economists expecting a pickup from the April data. Industrial and manufacturing production data is also set to hit the tape.
And the NAHB Housing Market Index is always an interesting release. And although expectations are for the index to rebound slightly, builders have had the view that conditions have been poor for more than a year now, and they're expected to stay that way. On Wednesday, keeping with the housing theme, we'll receive building permits and housing starts data for May, which is expected to see a pickup.
We'll also receive the weekly initial and continuing jobless claims numbers, which usually are released on Thursdays. But because it's a holiday, these data points are coming out on Wednesday instead. And these data series have started to increase in recent weeks, which we are keeping a close eye on because this is one of the best real time indicators that provides good insights into the job market.
And lastly, on Wednesday, we will have the next FOMC meeting. So in our view, we do think that the relatively soft inflation prints over the past three months makes it easier for the Fed to cut rates. However, given how resilient the labor market's been, we still feel that we need to see weaker data points here in order for rate cuts to resume.
So it's our base case that we'll get another 100 basis points of cuts starting in September. But this could be pushed out if payroll growth remains solid at the same time as tariffs are pushing up inflation. And then on Friday, we'll receive the Philadelphia Fed Manufacturing Index reading, which is expected to worsen a bit, as well as the May leading indicators index that is expected to change back into positive territory on a month over month basis.
So that's it on the economic calendar. But if I take a look at some earnings releases that are set to come out next week, we will hear from a pretty diverse set of companies, including Lennar, Accenture, Darden Restaurants, CarMax and Kroger. And finally, the risk of a wider conflict in the Middle East is intensifying.
So CIO globally will be making sure to stay on top of the latest developments as well. OK, perfect, Matt. Thank you so much for joining us.
Thanks, Siobhan. And have a great weekend, everyone. Thank you for tuning in.
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