Markets Today: US consumers happy even as clock ticks on so many deals

US consumer confidence is the highest its been in 18 years, even as the US trade deficit worsens, largely through weaker agriculture exports.

By Rodrigo Catril

Today’s podcast

https://soundcloud.com/user-291029717/us-consumer-happy-even-as-clock-ticks-on-so-many-deals

Overview: Neighbour Neighbour

Equities take a breather after a solid start to the week
NAFTA – mixed signals from CAD and MXN
AUD struggles on Trump’s and Ross China comments
USD flat but UST yields higher amid mostly solid US data releases
US Consumer confidence hit highest level since October 2000
US Senate confirms Clarida nomination to Fed Vice Chair
US 2Q GDP growth second reading the data highlight today and EU Malmstrom speak on trade

Neighbour, neighbour helps me breathe out every day, Neighbour, neighbour keeps me up at night- Violent Soho

While European equities had a mixed night, US counterparts managed to close with minuscule gains. The USD is flat in index terms and US Treasury yields are higher on the back of mostly solid US data releases. After yesterday’s comments by President Trump, that “it’s just not the right time to talk [to China] right now”, overnight Commerce Secretary Wilbur Ross said the US was focused on sorting out trade agreements in “our own neighbourhood” before moving onto China. AUD trades a bit softer amid market concerns over the lack of US-China trade talks progress while CAD and MXN give mixed signals on NAFTA. CAD outperforms on hopes Canada will join Mexico on agreeing a new NAFTA deal, but MXN more than reverses its recent gains amid concerns a new NAFTA deal may not get over the line.

Currencies

CAD (+0.25%) and CHF (+0.345%) are the big performers over the past 24 hours with the USD little changed in index terms over this period. CAD appears to be benefiting from hopes that Canada will agree to a revised three way NAFTA deal. While there remain a number of sticking points between Canada and the US, including the protections afforded to the Canadian dairy sector, the market seems to be viewing recent developments positively for now.

MXN in contrast is down 1.69%, more than reversing gains achieved over the past couple of days and it is now back trading above 19. MXN underperformance can be attributed to numerous reports (examples here and here) suggesting the preliminary trade agreement with the US is far from complete and it still needs US Congress approval. In a nutshell it seems that many contentious issues remain unresolved and there is a very tight timeline that needs to followed if a NAFTA deal is to be ratified by the current US Congress.

Meanwhile the AUD has essentially traded sideways, after reaching an overnight high of 0.7362, the Aussie now trades at 0.7338, 0.19% lower to its level this time yesterday. AUD’s weakness can be largely attributed to a delay reaction to President Trump remarks denting expectations of a quick trade resolution with China. Yesterday Trump said that he doesn’t see a quick end to trade tensions with China adding that “They want to talk,”. But “it’s just not the right time to talk right now, to be honest.”. US Commerce Secretary Wilbur Ross reinforced this view overnight, noting US was focused on sorting out trade agreements in “our own neighbourhood” before moving onto China.

The EUR initially moved up towards resistance near 1.1750, but it has since retraced back towards 1.17 (+0.2% on the day). Meanwhile, the GBP weakened 0.2% against the USD with the lingering risk of a ‘no-deal brexit’ continuing to hang over the market. Overnight, Theresa May quoted the head of the WTO in saying “he said about a no-deal situation that it would not be a walk in the park, but it wouldn’t be the end of the world”, and she added “I’ve said right from the beginning that no deal is better than a bad deal.” The market’s concern is that a no-deal brexit is being gradually destigmatized and can no longer be ruled out

Bonds

Unlike the USD, US Treasury yields showed a bit of life in a night where US data releases were mostly better than expected. The July trade deficit was worse than expected, but consumer confidence and the Richmond Fed Manufacturing survey beat expectations (see more below). US Treasuries sold-off another 3bp and the curve steepened a touch. 10yrs are at 2.88% – still well within the 2.80-3.01% range that has held since early June. A 5y note auction met reasonable demand.

Earlier in the session, Italian yields rose to fresh recent highs of 3.20% following comments from one of the two Deputy PMs’ (Di Maio) that he could not rule out Italy breaching the 3% EZ budget deficit limit with the 2019 Budget. In addition Italian stocks fell after the other Deputy PM Salvini was involved in a stand-off on immigration over the weekend. Italian Finance Minister Tria has since said the the country plans to keep deducing its debt to GDP ratio and is not planning to breach the 3% deficit limit.

Equities

US equities managed to record small gains for the day, after trading in and out of positive territory during the overnight session. The S&P500 briefly rose above the 2900 mark for the first time ever, but closed the day at 2897. European equities had a mixed night, Japan equities recorded small gains and the Shanghai composite closed with a small loss.

Commodities

Brent crude dropped 0.3% to $75.96 a barrel and WTI fared worse, losing 0.44% ending the NY session at $68.53. Metal prices did OK with the LMEX index climbing 0.92% and aluminium was the outstanding performer gaining 1.84%. Copper gained 0.48% on the back of reduce risk of supply concerns amid positive wage resolution in a Chilean mine.

Economics/ Politics

US Goods trade deficit a little worse than expected in July at -72.2bn against expectations of -69bn. Census Bureau notes this was driven mostly by slightly lower exports (Exports were $140bn in July, $2.5bn less than in June).
US Richmond Fed Manufacturing very positive in August, rising to 24 in August from 20 in July. So overall still no evidence of tariff/trade war talk weighing on businesses. Note that skilled labour is becoming more difficult to find, with the availability of skills needed dropping to its lowest level on record.
US Consumer Confidence still elevated with the Conference Board Measure 133.4 in August from 127.9 in July and is the highest level since October 2000.
Steven Mnuchin is “not at all concerned” about the flattening yield curve, and said Fed Chair Powell is doing a “phenomenal” job at the Fed
Economist Richard Clarida won Senate confirmation to be vice chairman of the Federal Reserve. Clarida, a Columbia University professor and global strategic adviser at PIMCO, received backing Tuesday in a vote of 69 to 26. In a separate voice vote, the Senate confirmed him to the remainder of a 14-year term as board governor that expires in 2022 (Bloomberg).

Coming up

Dead quiet in the data front today with the second US 2Q GDP reading the highlight. This evening Germany gets its September Consumer Confidence reading and then tonight the US releases pending home sales (Jul) along with mortgage application data.
This morning BoJ’s Suzuki speaks at Naha followed by a press conference and tonight EU Trade Commissioner Cecilia Malmstrom speaks in Stockholm. Along with EU Commission President Juncker, Malmstrom has beenpheavily involved in the resumption of US-EU trade talks, so the market will be on the lookout for any sound bites from Miss Malmstrom.
Re the second Q2 US GDP reading, the market is looking for a small downward revision on the annualised quarterly reading to 4% from 4.1%.