Today’s podcast

https://soundcloud.com/user-291029717/markets-resting-on-hope-of-a-tariff-delay?in=user-291029717/sets/the-morning-call

Overview: Just like paradise

• Uncertain but relatively calm market mood into the US-China trade talks
• And with the documents done for US tariffs to rise at the end of the week and Trump tweet hailing tariff revenues
• Iran threatens to abandon nuclear restrictions unless Europe does not throw a lifeline within 60 days
• Pompeo responds in a measured way; Europe urges Iran to continue with its commitments
• AUD sitting just below 0.70; AUD/NZD back to pre-RBNZ levels, the post NZ cut policy outlook not overtly dovish
• RBNZ wash up:  After yesterday’s saw-tooth post-RBNZ price action,
• Chinese trade shows a smaller surplus, as imports revive but exports disappoint.  CNY stable; AUD more closely following the market’s risk mood
• German industry: the softness continues?
• Brainard speaks of the Fed’s one year review of monetary policy; says “make up” policy on low inflation is appealing but has pluses and minuses
• Trade talks the main focus; some more Fed speak tonight including Powell

The market mood has stabilised overnight, despite confirmation that the administrative arrangements have been put in place to activate the increase in US tariffs from the end of this week.  Presumably that’s on the basis that a deal is not struck and it’s back to square one with even higher tariffs risking further trade and economic dislocation.  The talks are of course about to commence and the market will be watching developments closely.

Overnight, Reuters ran a piece exploring why trade talks had broken down over the past week between the US and China, sources stating China backtracked on a range of legal issues throughout the text of the proposed 150-page trade agreement, reversing the key points of agreement on US demands.  Seen in this light, it is understandable why the US side has become very agitated.

Not only was the necessary paperwork done to ratchet up tariffs on $200bn of Chinese imports to 25% on Friday, Trump further taunted the Chinese with another tweet extolling the revenue benefits of higher tariffs:

• “The reason for the China pullback & attempted renegotiation of the Trade Deal is the sincere HOPE that they will be able to “negotiate” with Joe Biden or one of the very weak Democrats, and thereby continue to ripoff the United States (($500 Billion a year)) for years to come…Guess what, that’s not going to happen! China has just informed us that they (Vice-Premier) are now coming to the U.S. to make a deal. We’ll see, but I am very happy with over $100 Billion a year in Tariffs filling U.S. coffers…great for U.S., not good for China!”

Trump’s Press Secretary said that the White House has gotten an indication that China wants to make a deal, while China’s Commerce Ministry warned the government will “have to adopt necessary countermeasures” if tariffs are increase.

That uncertainty remains and it’s a long way from the expectation of recently as a week ago that the two sides had almost agreed on the document and this week more a formality rather than another meaty round of negotiations.  It’s still not done and it could easily go pear-shaped again.

Stocks have been relatively steady overnight in both Europe and the US, European bond yields little changed, US Treasury yields one to three basis points higher along the curve, yields remaining lower for the week.  An overnight $27bn auction of 10 year Treasuries did not go well, the bid cover ratio the lowest in a decade.

On the commodity front, oil prices have backed up somewhat, WTI us 0.94% to $61.99/bbl after the EIA reported a 4mb decline in inventories (against an expected rise) and with the Iran situation more tense.

Base metals were lower, the LMEX down 0.67% and copper by 0.56%.  Bulk commodity prices remain relatively steady, iron ore in the low 90s and met coal futures at $205/t.  Port Hedland iron ore shipments recovered in April after the Cyclone Veronica March disruptions.  Gold is little changed, down 0.30% to $$1281.7/oz, $A1832.64.

Trump also upped the ante on Iran further, imposing sanctions on iron, steel, aluminium, and copper.  He said “ Today’s actions targets Iran’s revenue from industrial metals – 10% of its export economy – and puts other nations on notice that allowing Iranian steel and other metals into your ports will no longer be tolerated.”  Europe is urging Tehran to continue complying with the terms of the 2015 Accord.

Currency movements have been relatively contained, the DXY not making new moves either way, trading in the top segment of its range so far this week.  That tinge of risk off has seen the AUD sit back at just below 0.70 this morning, down 0.44% from late APAC time yesterday, the NZD faring better, down 0.25%, AUD/NZD this morning at 1.063 pretty much where it was before the RBNZ cut yesterday.  The NZ OIS market has shifted rate cut pricing for the cycle from 40 to 46 bps, a relatively modest move.

In that context, we note that Governor Orr has not sounded especially dovish about the outlook for the economy and rates, that the uncertainty factor is large, hinting of an insurance nature to the move.  Another is partially priced in the months ahead in sympathy with the RBNZ rate track.  The Bank indicated there is now “a more balanced outlook for interest rates”.

As for Brexit news, the UK Parliamentary 1922 Committee has met and determined not to change the leadership challenge rules so May lives on.  The press is suggesting that the talks with the Labour Party are close to ending without a deal.  PM May has told the head of the 1922 Committee Graham Brady that she is working toward getting a deal passed through Parliament before the European elections.

Of course, the press is full of the news of the new royal baby’s name, Archie Harrison Mountbatten-Windsor, and without a title.

Coming up

• RBNZ Governor Orr is at a Parliament Select Committee, testifying on the MPS at 10am Wellington time
• Chinese CPI and PPI for April are released this morning and have not been at all market sensitive.  For the record, headline CPI is expected to rick higher to a non-threatening 2.5% from 2.3% with PPI also up marginally, from 0.4% to 0.6%.
• Otherwise it’s quiet locally until the fuller detail of the RBA’s rejigged growth outlook is out tomorrow in the quarterly Statement on Monetary Policy.
• For those with half an eye on the UK resi market, the April RICS House Price Balance is out (L: -24%; F: -22%), at the lowest levels not just since the Brexit referendum but back to post GFC levels.  It’s averaged +15 since the late 1970s.  That’s at 9.01 AEST.
• There are several key Fed speakers at a Fed Conference tonight.  Jay Powell is slated for “Opening Remarks” at the Community Development conference in Washington, one that’s to focus on challenges faced by the middle class.  Fed President Evans is speaking too; his commentary has been more wary of the risk of lower inflation and what that could mean for easier policy down the track.  He’s a FOMC voter this year.  Also speaking at that conference is Fed Governor Brainard.  .
• Separately, Atlanta Fed President Bostic is speaking about the Economic Outlook in New Orleans tonight.  Speaking in mid-April, before the latest FOMC, he said that rates “are close to neutral if not there”.  That’s not too different there from what we’ve heard from the likes of Kaplan, Clarida, and Quarles overnight.
• It’s a relatively quiet night for data with weekly Jobless Claims, the full (goods and services) trade balance for March after this week’s goods balance, PPI (CPI is tomorrow night).
• It’s all about focus on the trade talks and the aftermath.

Market prices

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