A further slowing in growth
On #TheMorningCall from @NAB, the US dollar recovers a little and stocks rise as investors hope tariff talk is more rhetoric than action. Plus, payroll figures tonight.
US stock markets continue to lead currency and interest rate markets by the nose. A third consecutive night of gains, on further reduced Sino-US trade tensions and now a recovery in the technology sector (the NYSE’s FANG+ index is up 1.5%) have been the drivers. The S&P500 is up 0.7% and some 3% up on Monday’s close to put it just shy of 1% up on where we left off for Easter.
Bond yields are higher (10 year Treasuries are up 5bps to 2.83%) and the US dollar up 0.34% in DXY terms. USD/JPY is the biggest G10 mover, up 0.6% to ¥107.40 to its best level since late February, as befits the pair that has proved most susceptible to the negative impact on risk sentiment from earlier heightened trade angst.
The surprise perhaps in currency markets is that the AUD is down by 0.4% to 0.7687 as I write (and as low as 0.7674) despite the fact the Aussie has been the currency that has been among the worst affected by rising fears about a Sino-US trade war. Commodity prices are also slightly higher for the most part, typically AUD-supportive. It’s fair to say the softness is mostly just a US dollar thing – e.g. the NZD is down by a similar amount – though it does also support the thesis that the AUD is still a ‘sell on rallies’ currency.
Soothing words from President Trump’s (current) chief economic adviser Larry Kudlow have been a market factor. He’s been back on the media circuit talking tariffs saying “it’s nothing around the corner…there’s going to be big discussion about it”. White House trade advisor Pete Navarro has also been out saying that top government officials between the two countries will be in talks before any new tariffs are imposed.
The Canadian dollar continues to go from strength to strength, being the only major currency to strengthen against a rising USD dollar in the last 24 hours, with AUD/CAD and NZD/CAD both down by more than 0.5%. More positive signs of an imminent NAFTA trade agreement are doing the trick here, with Canada’s PM Trudeau out saying that NAFTA talks are “moving forward in a significant way”. This followed reports the US had softened its stance on a key NAFTA demand regarding North American content in car manufacturing. It’s possible that an ‘in principle’ new NAFTA deal could be announced as early as next week at a summit scheduled to take place in Peru.
Anyone wanting to instead take a glass-half-empty view on how US trade policy evolves in coming month could do worse than look at the latest US trade figures. The deficit widened for the sixth consecutive month in February to $57.6bn. Royalty payments of about a $1bn for TV rights to the Winter Olympics were a factor, but do nothing to disguise the fact that the monthly trade deficits have widened out to $55-60bn per month from $40-45bn a year or so ago, mostly driven by the trend in imports which have outpaced rising exports (when the gap between the two is so big, exports have to grow a lot faster than imports to shrink the deficit). The widening trade gap versus Q4 2018 could knock as much as 1% off Q1 GDP and see growth drop below 2.5% (the Atlanta Fed’s latest GDPNow estimate has been revised to 2.3% from 2.8% post the trade figures).
The other significant ‘miss’ on data releases was the UK services PMI which fell to its lowest level since July 2016 (i.e. straight after the ‘Brexit’ vote). However, the fall to 51.7 from 54.5 was blamed squarely on the weather (the ‘Beast from the East’) and is likely to bounce back in April. Certainly it shouldn’t in itself derail a rise in Bank Rate from the Bank of England on May 10th.
Final Eurozone PMIs came in about 1/10% or so below preliminary estimates. They are down from late 2017 highs but still very elevated.
Finally the One Fed speaker overnight was Atlanta Fed president Raphael Bostic a current FOMC voter – who said he sees PCE inflation hitting the Fed’s 2% target in the next quarter or two and “I am actually very comfortable going above 2% by some amount…2.2%, 2.3%…I don’t think that is a crisis of overheating”. The comments serve to underscore the symmetric nature of the Fed’s 2% inflation target.
Fed chair Powell speaks on US economy at 1:30pm New York time, then Williams at 4pm
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