June 24, 2019

Markets Today: glimmer of hope for Europe

European markets reacted to better than expected PMI numbers on Friday

Today’s podcast


Overview: Friday on my mind

  • US front-end yields, USD lower again Friday; Fed’s Kashkari writes that he wanted 50bp rate cut last week
  • Slightly better Eurozone PMI data adds support to EUR/USD, Friday’s biggest G10 gainer; AUD and NZD higher but barely so
  • US Commerce Dept. adds 5 more China technology firms to the banned entity list
  • China People’s Daily on Saturday says all existing tariffs must be removed if US wants to negotiate on trade
  • G20 Friday and Saturday looms large
  • RBA’s Lowe speaks in Canberra today, German IFO survey tonight

Friday saw the downward pressure on the US dollar maintained but this was much more evident against European currencies than either the AUD or NZD, both ending Friday little changed.  The Euro, Swedish and Norwegian Crowns all gained by 0.7% Friday, closely followed by the Swiss France (0.5%) then Sterling (+0.3%). AUD/USD and NZD/USD closed up just 0.04% and 0.03% respectively, whereas the Canadian Dollar lost 0.23%. Of note here is that historically CAD has underperformed other commodity/growth linked currencies when the big dollar is falling – logical if this is in the context of a slowing US economy, being Canada largest trading partner by far – and this may now be starting to play out. If so, it draws a line under the 3%+ fall in the AUD/CAD cross since the beginning of June (and 5%+ since April)

Two factors were largely responsible for Friday’s moves in both currency and rates markets – small improvements in Markit Eurozone PMI data and comments from Minneapolis Fed president Neel Kashkari that he agitated for a 50bp Fed rate cut last week.

The ‘flash’ June Eurozone PMI data realised small improvements for both manufacturing and services readings in both France and Germany; albeit the improvement in German manufacturing – from 44.3 to 45.4, means only that an ongoing contraction is now proceeding more slowly.  Plus, the pan Eurozone manufacturing index only lifted to 47.8 from 47.7 and services from 52.9 to 53.4, suggesting that other parts of the Eurozone (likely Spain and Italy in particular) are still deteriorating.

In contrast to the small improvements in Eurozone PMIs, the Markit version of US manufacturing PMI fell to a 9-year low of 50.1 from 50.5 and services to 50.7 from 50.9.  Recall it was the fall in the Markit manufacturing PMI from 52.6 from 50.5 in May that really got the ball rolling in terms of early Fed easing hopes and Friday’s data plays with the grain of strong expectations for a July cut.

Could a move from the Fed next month be by 50 points?  Unlikely in our view, but in a blog post published early afternoon New York time on Friday, Minneapolis Fed president Neel Kashkari revealed that he had advocated an immediate 50bp rate cut at last week’s FOMC meeting.  Kashkari is a non-voter this year so his dissent didn’t get recorded in the Statement or voting record.  And Kashkari was publicly dissenting from the entire 2017 Fed rate rises when a voting FOMC member.  As such, he can be seen as an outlier, much as St; Louis Fed president James Bullard’s and who also wanted a rate cut last week. This though doesn’t mean we won’t start to see their views reflected in actual policy changes as early as July.

As an aside, if Donald Trump is re-elected President next year and decides not to re-appoint Jay Powell as chair in early 2021 as is his right, then in so far as the chair has to come from existing Fed Board members, Kashkari should probably be considered a front runner to succeed Powell. Let’s see if he makes a move from Minneapolis to fill one of the Washington Board vacancies next year – that would be very telling!

Kashkari’ s comments look to have been responsible for a renewed dip in front-end US rates on Friday afternoon, the two-year note ending the session -1bp at 1.7678% whereas 10s rose by 2.5bps to 2.054%, the latter keying off a 3-4bps rise in benchmark Eurozone yields post the PMI data.

Ahead of the Friday/Saturday G20 meeting in Osaka and which at this stage is still set to include a meeting on the sidelines of G20 between Presidents Trump and Xi, two developments since we left off on Friday worth noting.  One is the US Commerce department adding 5 additional Chinese technology firms to its banned entity list, preventing US firms from supplying to them. This is a poor omen for any thoughts of an extension to the current 90- day moratorium before US firms have to stop dealing with Huawei (currently due to take effect on August 29th).  The news hit US chipmakers on Friday leading to a 0.5% fall in the IT sub-sector of the S&P5 500, contributing to overall declines of 0.13% in both the S&P and Dow Jones and bigger 0.24% fall in the NASDAQ.

The other was an editorial in Saturday’s’ People’s Daily, a mouthpiece for China’s ruling Communist Party, saying the US must drop all tariffs imposed on China, if it wants to negotiate on trade, and only an equal dialogue can resolve the issue and lead to a win-win, the newspaper said.

Finally in commodities oil held firm on Friday, Brent and WTI crude up another 1.2% and 0.6% respectively taking the weekly gain for WTI to over 9% and over 5% for Brent.  Trump said that he called off a planned military strike against Iran after learning that 150 people might have been killed; something he didn’t think was proportionate retaliatory action for the earlier shooting down of a US drone. Iran said that it also showed restraint against shooting down a manned US aircraft near the drone it shot down. Commentators noted that this suggested neither side wants a war in the Middle East. Trump is expected to announce further sanctions against Iran today.

Coming up

RBA Governor Lowe participates in a panel discussion on the global economy at an ANU Crawford Australian Leadership Forum in Canberra starting at 9:30 AEST. In last week’s post-speech Q&A, the Governor mentioned either July or August for a follow up to the June quarter point rate cut; its therefore unrealistic to think we will get anything more out of him on domestic policy thinking today – all the more so given it’s the global not domestic economy that is the subject of the discussion.

Tonight we get the latest German IFO survey, with keen interest in whether the thin shaft of light evident in Friday’s PMI today is also reflected in what is the German equivalent of the NAB business survey.

In the US, we get the Dallas Fed Manufacturing Activity Index

Market prices

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