Financial markets are beginning the week with an optimistic mood, as China and the United States reported "substantial progress" in their weekend trade talks, sparking hopes of a dramatic reduction in tariffs between the two economic giants.
With a press conference expected later today, traders are eagerly awaiting more details on the talks, particularly around the potential for tariff cuts and the future of US-China trade relations under the Trump administration.
Kathleen Brooks, research director at XTB, highlighted the market's current high risk appetite, saying that "the market is primed for a dramatic cut in tariff rates between the two nations." Brooks also noted that the market has been led to expect substantial progress, but added that anything less than a clear resolution could dampen the market's enthusiasm.
"If the press conference fails to deliver the level of detail that the market craves, it could curb the optimism around these talks," Brooks warned.
Another area of interest this week is corporate forward guidance. Many US companies refrained from providing earnings forecasts during the first quarter, citing the uncertainty surrounding US-China trade relations.
If the trade situation improves significantly, there could be a surge in the release of forward guidance, which could boost sentiment and provide clearer expectations for future corporate earnings.
This week’s earnings season will include reports from hundreds of companies, with attention on Dow 30 members Cisco and Walmart.
As trade risks moderate, attention is shifting towards the pharmaceutical sector. Brooks pointed out that President Trump’s plan to cut prescription drug prices could have significant implications for European pharma companies, including AstraZeneca, GSK, and Novo Nordisk.
US economic data: CPI, retail sales, and more
This week, several key economic reports are expected to provide deeper insights into the state of the US economy.
A critical release will be the US Consumer Price Index (CPI) for April, set to be revealed on Tuesday.
Deutsche Bank's forecast for the April CPI is a modest gain in both headline and core inflation, with the year-over-year growth rate for core PCE expected to stay at "just barely round up a tenth to 2.7%."
Analysts anticipate that weaker gas prices will keep the headline CPI increase modest at 0.26%, while core CPI is expected to show a slightly stronger rise of 0.29%.
While the tariff impact is unlikely to be fully reflected in April’s data, traders will be closely monitoring sectors with high exposure to China, such as apparel and household furnishings.
A higher-than-expected inflation reading could lead to increased market volatility, particularly affecting consumer and cyclical stocks.
Later in the week, retail sales data on Thursday will provide insights into consumer spending, with expected dips in auto sales and gasoline prices weighing on the headline figure. However, analysts are optimistic that retail control, which tracks spending on goods, will remain solid, bolstered by strong sales in non-store retailers and home furnishings.