With much of the investing world preparing to take the next two weeks off for vacation right after Friday's payrolls number hits, one question being thrown around by traders is "what could possibly go wrong" in the immediate future?
Answering this question this morning are two bank economists, first, below we present the thoughts from UBS' global chief economist Paul Donovan.
What could possibly go wrong in the next fortnight? The world is in a rather dull mid-cycle economic position. This does not make for good television (hence the tendency to sensationalize dubious quality data), but it suggests a steady economic state.
The inflation story is nothing to get excited about. We have had the easily forecast rise in inflation as weirdly weak oil prices dropped out of the calculation. Now most developed economies have inflation rates around their long-term averages.
Policy-makers do need to consider the medium-term position. The tightness of labor markets will influence inflation (in the medium term, not in the next 24 hours). The Fed's summer camp for economists at Jackson Hole is the next opportunity to communicate clearly on normalizing policy in an utterly normal economic environment.
Politics continues to resemble a rather badly written daytime soap opera that no one would dream of admitting to watching, but which still seems to get viewers. Politics matters to longer-term trend growth rates. It does not matter much in the short-term cycle.
And here is Deutsche Bank's Jim Reid who, similarly, sees little reason to worry for the immediate future.
Many in the market continue to talk about it being a carry trade until at least Jackson Hole in 3 and a half weeks’ time. The chatter on the US debt ceiling that we've discussed before also continues in the background with some saying the Trump administration will struggle to build a consensus around the smooth raising of it as we approach it around October time.
The thing that worries investors most from an immediate event risk point of view is an escalation of tensions between the US and North Korea. Could we wake up one morning to find the US has used force in some way in the peninsula? Clearly its impossible to predict but that doesn't prevent some from using it to handicap their view.
We also have the Fed and the ECB likely to stop reinvestment and announce a fresh taper in September and October respectively. So plenty to think about after the holidays are over but for now most investors are riding carry trades. In the days leading up Jackson Hole it'll be interesting to see if that changes but markets probably have two weeks before it comes into view enough to focus on.