The Weekly Update

Donald Trump continued to grab the headlines for much of the week first with more news on tariffs and then at the end of the week agreeing to meet with Kim Jong-Un in May. Trump officially went through with his “very flexible” 25% steel and 10% aluminium tariffs, highlighting regional allies, or as Trump refers, “real friends” Canada and Mexico as currently exempt. The tariffs, which will take effect in the next couple weeks could “go up or down, depending on the country”, with Trump adding that countries could be dropped and added. Potentially adding fuel to the fire, the US’s January trade deficit registered USD56.6bn up from a revised USD53.9bn in December and at the highest level since July 2008.  The fallout from tariffs continued to build with the EU threatening to respond with its own set of tariffs. This clearly, added to investor nervousness about the negative repercussions of a trade war, particularly after the resignation of Trump’s economic advisor Gary Cohn.

At the opening of China's NPC, on Monday, Premier Li Keqiang did not appear to respond directly to the tariff threat, however, he did mention that China would protect its interests and would look to open up its markets and reduce caps on foreign investment. China’s Foreign Minister Zhang Yesui did, however, say that “China does not want to fight a trade war with the US, but we absolutely will not sit by and watch as China’s interests are damaged”. China’s trade data surprised to the upside, with exports up 44.5% (versus expectations for +11%, in dollar terms) and the trade balance beat the market’s deficit expectations at USD 33.74bn surplus. Importantly, China's trade surplus with the US jumped to ~USD21bn, which is the highest reading ever recorded in a February. So China could be one of those countries where tariffs could potentially “go up”.

The National People’s Congress approved a constitutional change to remove the two term limit for the country’s President which will allow Xi Jinping to stay in power beyond 2023.  The PBoC’s Governor Zhou Xiaochuan completed his final official briefing before retiring and his successor is expected to be confirmed on March 19.

We also had a mixed bag of US employment readings for February, a strong non-farm payroll print showed that 313k jobs were added (consensus +205k) with an upward revision in January, but the unemployment rate remained at 4.1% (consensus 4.0%), and the participation rate increased to 63% (from 62.7%). However, of more importance is the change in average hourly earnings as inflation remains on everyone’s minds; the month-on-month reading disappointed at only 0.1%, and missed at 2.6% yoy, down from January’s reading.  The previous average hourly earnings number, at 2.9% in January (revised down to 2.8% today), was the highest reading since 2009, and the subsequent market sell-off was a result of increased upside inflation risks, thus further Fed tightening concerns. However, during his recent testimony, new Fed Chair Jerome Powell stated that wages do not appear to be causing any upside risks as yet, adding that a gradual approach to normalising would be maintained. There is a near certain chance of a hike on March, 21, and the market is almost fully pricing in a third hike for 2018.  The yield on the UST 10 year yield rose 3 basis points to 2.9% at Friday’s close while the UST 30 year yield rose 2 basis points to 3.16%.

The ECB left interest rates unchanged and will continue to buy €30bn of bonds per month but it tweaked the statement wording removing an explicit commitment to increase bond purchases. However, Mario Draghi struck a dovish tone at the press conference stating: ‘We shouldn't forget that we have kept the other reference to such a possibility when it says: the Eurosystem will continue to reinvest the principal payments for an extended period of time after the end of net asset purchases and in any case for as long as necessary. All in all, if you read this decision – by the way the decision was unanimous – that's what it is. It's substantially a backward-looking decision without signals or implications for either our expectations or our reaction function. We still expect the key ECB interest rates to remain at their present levels for an extended period of time and well past the horizon of our net asset purchases.’  Elsewhere, the Bank of Japan left its policy settings unchanged.

This week, the US CPI, PPI and retail sales prints for February are likely to be a key focus for investors.  Mid-week China releases activity data including industrial production fixed asset investment and retail sales.  Philip Hammond, the UK Chancellor, is due to give his Spring Statement on Tuesday with scope for some updated economic and public finance forecasts.  On the political front discussions are still underway to form an Italian government.

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