Today’s podcast

https://soundcloud.com/user-291029717/nab-revises-forecasts-as-trade-tensions-rise-pound-pummelled-salvini-fires-election-salvo?in=user-291029717/sets/the-morning-call

Overview: I don’t care

• Friday ends on a sour note as Trump suggests China meeting may be cancelled
• US equities halt three day winning streak while UST yields edge a bit higher
• White House trade advisor Navarro threatens strong action if China devalues Yuan. Navarro still expect trade talks to take place
• UK economy contracted in Q2 – Brexit woes take their toll
• GBP gets smoked and 10y Gilts fall close to all-time lows
• After a volatile week AUD ends a few bps lower while NZD consolidates losses
• Oil rebound continues in spite of IEA downgrade to global oil-demand
• Week highlights – NAB survey, wage price index, employment/ unemployment; NZ PMI & CPI partials; China activity data, US CPI and retail sales. …and of course any US-China trade headlines

I don’t care, oh I don’t care, Oh no I don’t care –  Cheryl Cole

After trading higher for three consecutive days, US equities ended last week on a sour note following comments from President Trump suggesting he didn’t really care if China trade talks took place in September, further reinforcing the growing view that both economic powers are gearing up for a protracted  trade war. In spite of the negative trade news, UST yields, edged a little bit higher on Friday and the USD was little changed. AUD and NZD weakened a little on Friday night, but GBP was the biggest loser after data showed the economy contracted in Q2. Meanwhile in the commodity complex, iron ore prices declined again, gold closed just below the $1500 mark and oil prices continued to recover notwithstanding another IEA downgrade to global oil-demand.

After a shaky start to the Friday’s overnight session, US equities embarked on a decent recovery and at one stage it looked like all three main equity indices could end the week recording a fourth consecutive days of gain. These expectations banished in the last hour of trading following comments from President Trump giving the impression that he was not bothered whether or not US-China trade talks would take place in September. He said “We’ll see whether or not we keep our meeting September…if we do, that’s fine. If we don’t, that’s fine”. There was also some market confusion after Trump said “we’re not doing business with Huawei”, but the White House later clarified that he was only referring to the ban on Federal Departments buying from Huawei. Earlier during our Friday morning, Bloomberg reported that the White House was holding off on a decision about licences for US companies to restart business with Huawei after Beijing said it was halting purchases on US farming goods.

After the market close, and playing good cop for change, White House trade advisor Navarro, a known China Hawk, said he was still expecting a new round of talks with China to go ahead as planned in September. However he also expressed discontent with China’s strategy to devalue its currency, adding that structural changes from China, such as an end to massive subsidies to state own companies, forced technology transfer in exchange for access to the Chinese market, cyber intrusion and Fentanyl trade ( that is killing 100 Americans a day), were all  needed in order to get a deal over the line.

The Dow Jones ended Friday down 0.34%, the S&P 500 dropped 0.66% while the tech-heavy Nasdaq Composite fell 1%. All three major indices posted losses for the week, with the S&P 500 down 0.5%. Meanwhile on the other side of the Atlantic, major European indices also closed in negative territory with the STX Europe 600 index closing the day -0.84% and down -1.74% for the week.

The USD was little changed in index terms with DXY closing the week at 97.49 , but GBP on the other hand was the big mover, losing 0.82% against the USD to 1.2033 following an unexpected contraction in the UK’s Q2 GDP print. UK GDP was soft at -0.2% q/q (zero consensus) and to 1.2% y/y. That’s the first quarterly decline since 2012. A weak outturn was generally expected due to prior stock-piling ahead of the 29 March original Brexit date. That boosted Q1 GDP to +0.5% and some payback was anticipated. Inventories in Q2  subtracted 2.15 pct pts from GDP, business investment remains soft at -0.5%, but private consumption was reasonable at +0.5% and government spending was strong at +0.7%. Looking forward the weaker economic momentum seen in activity indexes may be partially offset by more stock-building ahead of 31 October and by a rebound in auto production as the August annual shutdown was moved to March this year.

CAD was the other big mover during Friday’s overnight session, but in the end the Lonnie closed the day little changed at 1.3222. Weaker Canadian employment sent the unemployment rate higher to 5.7%, against expectations but market reaction was muted to the extent that annual wage inflation rose to a decade-high rate of 4.5% y/y. Oil was another factor at play with prices  continuing their rebound ( WTI +3.7% to $54.5 and Brent $58.53 +2%) following last week’s comments from Saudi Arabia to engage with OPEC+ friends in order to reduce output. Gain in oil prices came about in spite of the fact the International Energy Agency downgraded its forecast for global oil-demand growth for the third time in four months, lowering it to 1.1 million barrels a day from 1.2 million barrels a day.

AUD and NZD ended the week about 0.20% lower at  0.6786 and 0.6468 respectively. The NZD met some resistance just under the 0.65 mark, before trending lower through the US trading session to close the week near the middle of the wider-than-usual 2-cents range for the week. After trading sideways during our session on Friday, the AUD also drifted lower later in the US session, reflecting a souring in market sentiment following President Trump comments. After highlighting downside risks to our AUD and NZD forecasts at the beginning of last week given the escalation in trade tension between the US and China, on Friday we officially downgraded our FX forecasts reflecting our new assumption that nothing materially positive in terms of US-China trade negotiations will happen at least through the remainder of 2019 and early 2020.

Global growth is likely to endure a challenging environment over coming quarters and our expectation is that the PBoC will allow the yuan to continue to depreciate, taking USD/CNY to 7.40. This combination is not a good recipe for commodities and growth sensitive currencies such as the AUD and NZD, as a result we have slashed our end of the year targets for AUD to 0.65 and NZD to 0.62.

US 10-year rates ended the week nudging higher, up 3bps to 1.74%.  This capped off a volatile week, which saw it trade a wide 26bps range. Italy’s bond market extended losses after the government’s call for a new election after it lost its majority.  Italy’s 10-year rate rose to 1.80%, taking its gain for the last two trading sessions to about 40bps. Currency markets don’t seem bothered by yet another election, with EUR nudging back up to 1.12.

Looking at commodities in more detail, copper prices eased 0.8% on Friday while iron ore fell another 3.9% to $93.6. Gold, was a tad softer, closing just under $1500, probably reflecting some profit taking, after a decent run of late.

Coming up

• We have a quiet start to the new week with many Asia countries are out on holiday today while New Zealand gets REINZ House Sales and electronic Card data.
• For Australia, the highlights for the week include RBA Deputy Governor Debelle Thursday’s speech on “Risks to the outlook”. The NAB July Business Survey is out on Tuesday and the Wage Price index is released on Wednesday ahead of the Labour force report on Thursday (NAB – 15k jobs unemployment one tenth higher to 5.3%), Markets is at 14k and 5.2%-unchanged).  Weak outcomes would place pressure on the Reserve Bank to cut again given that the Board said it was watching labour market developments closely.
• In offshore markets, aside from US/China trade tensions, the US gets CPI data on Tuesday and China activity data for July will be a major focus on Wednesday, will China’s data show any effects from the increase in trade tensions? Focus should then shift to the US and its resilience with July readings for retail sales, Industrial production, the Empire State and Philly Fed all out on Thursday.

Market prices

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets