- The second quarter was bullish for equities as the US set out to sign trade deals with its partners.
- Market participants are pricing a higher 91.5% chance that the Fed will cut rates in September.
- Economists expect the US economy to add 120,000 jobs in June.
Equities ended at record highs on Monday, driven by optimism over trade deals and a surge in expectations for Fed rate cuts. At the same time, it was the close of the best quarter in almost a year. Market participants are now gearing up for the US monthly employment report.
S&P 500 performance (Source: Bloomberg)
The second quarter was bullish for equities as the US set out to sign trade deals with its partners. Deals with China and the UK significantly eased global economic worries. Furthermore, the deadline for reciprocal tariffs is approaching, which may prompt more countries to sign deals with the US. On Sunday, Canada suspended its digital services tax, which had targeted US technology companies. The move will likely speed up negotiations and increase the likelihood of a deal.
Trade deals will reduce the impact of high tariffs and likely trade wars on the global economy. At the same time, it will reduce uncertainty in the US, allowing the Fed to lower borrowing costs. Already, the high levies have slowed down the economy. As a result, market participants are pricing a higher 91.5% chance that the Fed will cut rates in September.
Meanwhile, Goldman Sachs upgraded its forecast for rate cuts to three moves before the end of the year. Lower economic uncertainty and reduced borrowing costs will spur economic growth, boosting equities.
However, there is also a risk that some countries may not sign trade deals in time. Progress in talks with certain countries, such as Japan, has stalled. Trump noted that Japan was not ready to import US rice despite having a shortage.
Meanwhile, market participants are keeping an eye on Trump’s Bill in the Senate. The huge tax-cut and spending Bill will likely increase the country’s debt burden. As a result, investors are concerned about the country’s fiscal health if the Bill passes.
This week, all focus will be on the US nonfarm payrolls report. Economists expect the economy to add 120,000 jobs in June, down from 139,000 in the previous month. Meanwhile, the unemployment rate might jump from 4.2% to 4.3%. A downbeat report will increase pressure on the Fed to cut rates, further boosting equities.
