Trade tensions, the US employment dump and Powell’s address on Friday commanded market attention last week. China released a list of reciprocal 25% tariffs on US imports totalling USD 50bn, this followed the US’s $50bn tariff list covering over 1,300 Chinese products. It did appear that China’s quick response was a signal to the US that it will not sit back and be bullied but there was also no indication of when the tariffs would come due, allowing bilateral negotiations to continue. President Trump did tweet that there is no trade war with China, and Chinese authorities stated their openness to talks highlighting that “it takes two to tango”. Then just when we thought the dust had settled, Trump suggested listing a further USD 100bn worth of goods subject to 25% tariffs in response to China’s alleged “unfair retaliation”, with China looking to do whatever it takes and fight “to the end at any cost” in the face of US actions. The release of the US’s trade deficit, which had jumped to a 9.5 year high in February did little to calm market nerves, however, we believe there really is no positive outcome for either economy if they engage in a trade war, and remain convinced that current posturing will eventually end with a reasonable compromise; we continue to monitor the situation ahead of the final USTR approval on May 15.
The all-important US job report was broadly weaker-than-expected with only 103k jobs added (versus +185K consensus) while unemployment remained at 4.1% (vs 4%) and the participation rate decreased marginally; the labour market clearly remains strong and has proven to do so for some time now. Average hourly earnings are therefore the focal point for markets; both the month-on-month and year-on-year readings were in-line with expectations at 0.3% and 2.7%, respectively. US Treasuries rallied off the back of the softer jobs data. In terms of Fed rhetoric, Atlanta Fed’s Bostic said he expects inflation to pick up to target within the next couple quarters and would not mind an inflation overshoot above 2%, adding that he is still looking for three hikes this year. Broadly, Fed members agree to maintain a gradual approach to rate hikes and feel it is too early to estimate the impact of proposed tariffs on the economy. All eyes were then on Powell following the jobs report, he once again stuck to the script reiterating the above approach to tightening, adding that he expects upside pressures to wage growth as the labour market strengthens further.
USTs therefore enjoyed an interesting ride over the course of the week eventually closing 3bps higher at 2.77%, while the dollar managed to find some ground with the DXY Index up 0.15%. Meanwhile, the offshore renminbi fell 0.77% against the greenback off the back of increased trade tension concerns and the yen was down 0.61%. The schizophrenic equity market sold-off again last week, the VIX spiked and growth related commodities had an uneasy week.
Aside from weaker-than-expected EU PMIs and UK economic data prints for February markets were politically focused; there were also a number of market players out enjoying the extended Easter break. Activity could pick up this week with: the release of China and US CPI and PPI readings, the Fed minutes release and various BoJ, ECB and Fed members speaking. Facebook’s Zuckerberg testimonies could also draw some attention on Tuesday and Wednesday. We will also hear from China President Xi at the Boao forum (or Asia’s Davos), many expect Xi will discuss the opening up of China’s financial markets in the face of trade tensions. The US Congressional Budget may also give some colour on upcoming Treasury issuance, which has added downward pressure to yields, especially at the shorter-end.
Today will see the IMF’s World Economic Outlook and we will hear from Japan Governor, Kuroda, as he begins his second term. Interestingly, John Bolton will take his position as US national security adviser later; he was once referred to as “human scum and bloodsucker” by North Korea, so it will be interesting to see how the meeting between the two nations will pan out next month, assuming it still goes through. Tuesday kicks-off with Italy and France IP prints and later we will get the US PPI readings. Markets could perk-up on Wednesday with the China CPI and PPI data, UK IP, followed by US CPI data; Bloomberg currently has the month-on-month core reading at 0.2%, and 2.1%yoy. The Fed minutes from March’s meeting could be of interest following the 25bps hike. With little data and activity expected on Thursday, markets will be looking to Friday’s China trade data releases and US JOLTS report. Mr Trump’s South America trip will see him attending the Summits of the Americas where he hopes to announce a NAFTA agreement; developments will be watched closely through the week. No doubt the ongoing trade games will continue to command market attention.