The week ahead is likely to provide some clarification for investors on three fronts that have been a source of uncertainty.  The FOMC meeting, with updated forecasts, is center stage.  The credit markets are pushing the Fed to be aggressive but can be disappointed.  In the eurozone, the preliminary PMI may confirm a modest, even if uneven recovery.   The G20 summit is the focus of much attention as many see it as the last opportunity to avoid a further escalation of trade tensions between the world’s two largest economies, in a repeat of the Buenos Aires gathering at the end of last year.

US jobs data disappointed, and prices were soft.  The 3-month to 10-year yield curve continues to be inverted. After the May retail sales data that showed a resilient consumer, the interpolated odds of a rate cut now were halved to around 15%.  

The implied yield of the January 2020 futures contract is about 1.705%.  Currently, the effective average fed funds rate is 2.37%.  That implies 67 bp of easing continues to be discounted, which is 100 confidence of two  25 bp moves and roughly a 2/3 chance of a third cut this year.  The odds of a third cut this year may be a bit exaggerated if one assumes the Fed could lower the interest on reserves further away from upper-end of the target range.   After next week’s meeting, there are four meetings left in the year.

The FOMC statement will likely recognize that the slowing of jobs growth, which is still sufficient to keep the unemployment rate at the lowest in the generation and new cyclical lows of the underemployment rate.  It will also recognize that prices pressures remain soft.  Previously, the Fed maintained that the weaker inflation readings for transitory.  It may be too early to abandon such views, the confidence in the assertion may have weakened.