Today’s podcast

https://soundcloud.com/user-291029717/tariff-rollbacks-stock-market-up-big?in=user-291029717/sets/the-morning-call

Overview: Stock market up big today. A New Record. Enjoy!

• Trade deal optimism rises after China states the US has agreed in principle to remove some tariffs
• Curbing some enthusiasm though are conflicting reports on the US appetite to rollback tariffs
• Stocks hit record highs (S&P500 +0.3%), while yields surge (US 10yr +9.6bps to 1.92%)
• USD/CNH -0.8% and below 7 at 6.97, China proxies also higher with AUD/USD +0.4% 0.6901
• BoE dissenters take gloss off GBP, two out of nine wanted to cut in first split since June 2018
• Coming up today: RBA SoMP, China Trade Balance, US Consumer Confidence, Canadian Employment

While song titles are a normal staple of the daily, President Trump takes the honours today, summing up overnight sentiment in a 9 word tweet: “Stock Market up big today. A New Record. Enjoy!”. Prompting that move in equities was further optimism on an imminent US-China trade deal after China’s Commerce Ministry stated the US had agreed in principle to remove some of the tariffs as part of a deal – this going beyond the initial truce that the market had been pricing in. That optimism saw stocks reach record highs with the S&P500 +0.3% to 3,087, along with brutal sell-off in bonds with US 10yr yields +9.6bps to 1.92% (high of 1.97%), while US Fed cut pricing for 2020 now sits closer to 50/50 rather than the certainty it was seen as last week. USD/CNH was unsurprisingly sharply lower, -0.8% and below 7 at 6.97 with the AUD holding onto its China proxy role +0.3% to 0.6901. Curbing some of the moves as Sydney opens are conflicting reports on the US’ appetite to rollback tariffs. The other event worth highlighting overnight was a split BoE decision with two out of nine wanting a cut – GBP underperformed -0.3% to 1.2825. As for the USD, it rose 0.2% with improving risk appetite seeing USD/JPY +0.4% to 109.29, while EUR fell -0.2% in sync with GBP.

First to trade news in detail

As London opened last night China’s Commerce Ministry spokesperson stated that China and the US had agreed in principle to remove some of the tariffs as part of a trade deal: “both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement…This is what [the two sides] agreed on following careful and constructive negotiations over the past two weeks”. Notably there has been little comment from the White House on this, with media reports mixed on the US take. Bloomberg cited some US sources as confirming China’s comments, while Reuters suggests no decision on a tariff rollback has been made. There is also the possibility that what China has described as a tariff rollback is interpreted by the US as being part of a compliance mechanism in any phase 1 deal.

Either way though the elevation of discussion from a trade truce to a possible tariff rollback is important and suggests both China and the US have come under pressure to seal a deal. Highlighting this was China’s public trial of fentanyl traffickers, while in the US state governor races revealed potential re-election problems in suburban America. Kentucky and Virginia went Democrat, while the blue collar parts of Pennsylvania swung Democrat and a county in Delaware was won by the Democrats for the first time in 150 years (see a good Politico article on it). Adding to perceptions of tariff fatigue in the US administration was the EU’s Juncker who said there won’t be any auto tariffs on EU cars: “he won’t do it…you are speaking to a fully informed man”.

Market reaction was swift

With the S&P500 up 0.3% and hitting a fresh record high. Expectations for further Fed easing have also receded sharply – a cut in 2020 is now seen as a 50/50 rather than the certainty it was last week. With rate cut expectations being wound back, the focus for equities will likely now start to shift towards valuations. For bonds, US Treasury yields traded in a 17 points range (1.80-1.97%), with yields ending 9.6bps higher to 1.92%.

The other main event last night

Was the Bank of England which had its first split decision since June 2018 in voting to keep rates unchanged. There were two dissenters out of nine voters, including former hawk Saunders who cited threats to the outlook and signs that the labour market might be starting to deteriorate. The dovish bias form the BoE has seen markets price in a greater chance of a cut by end of 2020 with UK bonds also lagging the global selloff with UK 10yr Gilts +7.8bps to 0.79% while GBP/USD fell -0.3% to 1.2825.

Datawise it was a quiet night overnight

With only German Industrial Production for September of note. Production fell slightly more than expected at -0.6% m/m against -0.4% expected and confirming the drag coming from the manufacturing sector. Going forward however, a tentative pick-up in orders seen earlier in the week is giving some hope. A possible US-China trade deal should also give optimism to Europe given German exports make up around 47% of German GDP.

In the US

Jobless claims continue to show a solid labour market with Jobless claims dipping to 211k from 219k.

Yesterday in Australia

The ripper Trade Balance had little impact on the AUD. The trade surplus was $7.2bn against $5.1bn expected with the beat mostly driven by upward revisions. As for the rest of today, the RBA Statement on Monetary Policy is coming up, though is likely to be less of a surprise given the RBA revealed its major forecast changes at Tuesday’s board meeting (see Coming Up for details).

Coming up

Domestically the RBA Statement on Monetary Policy is the highlight, followed later in Asia with the Chinese Trade Balance. Mostly quiet elsewhere with only US Consumer Confidence and Canadian Employment data likely to garner attention:

• AU: RBA SoMP (11.30am AEDT): there will likely be less surprise around the SoMP this quarter given the RBA revealed its major forecast changes at Tuesday’s board meeting. In the post-meeting statement, the RBA described the economy as having reached a “gentle turning point” with growth expected to pick up from 2¼% by end 2019 (previously 2.4%) to around 3% in 2021 (previously 3.1%). Unemployment though is expected to remain around 5.2% for some time before gradually declining to a little below 5% in 2021 (unchanged), while underlying inflation is expected to be close to 2% in 2020 and 2021 (previously 1.9% and 2.1%). Notably absent from that description though was any mention of the weakness seen in retail sales, where growth in volumes was negative in Q3 and at -0.2% y/y the weakest since the 1990/91 recession. We would expect the SoMP to elaborate further on risks around consumption. NAB continues to think the economy needs further support and that the RBA’s growth outlook is overly optimistic.
• AU: Housing Loans (11.30am AEDT): the consensus looks for a 1.5% m/m rise in both owner-occupier and investment housing loan approvals.
• JN: Labour Cash Earnings (8.30am local, 10.30am AEDT):
• CH: Trade Balance (no time given): the October trade balance is likely to see a continued fall in exports (-4.0% y/y expected) and imports (-7.9% y/y expected) with the overall trade balance expected to be slightly higher at $40.1bn.
• US: Uni Michigan Consumer Sentiment (10.00am local, 2.00am AEDT): sentiment is expected to be little changed at 95.5.
• US: Fed Speakers – Daly, Williams and Brainard: unlikely to be market moving given the consensus emerging from the FOMC is that policy is now slightly accommodative.
• CA: Employment (8.30am local, 12.30am AEDT): after last month’s strong employment data, the consensus is for jobs growth of 15k with the unemployment rate unchanged at 5.5%.
• CA: BoC’s Beaurdry speaks: not likely to be market moving, is giving introductory remarks to a lecture titled as “explaining the growth decline in the US”

Market prices

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