Another mixed week across asset classes saw the yield on the 10-year UST rally 4bps, to 2.82% while the dollar softened 0.54%. Meanwhile, Brent, fell 2.68% after Trump barked that OPEC must “reduce pricing now!”. The renminbi also came back into the spotlight following the recent trade sentiment driven downturn. Although the offshore renminbi was broadly lower against the dollar, it had recovered into the end of the week; we believe the weakness was overdone and expect stability to return and for the currency to strengthen over the long term. The PBoC stated that it is not willing to intervene in the fx market, adding that it will maintain liquidity at reasonable and sufficient levels and that deleveraging remains on track.
The week ended with the US imposing 25% tariffs on USD 34bn worth of China’s goods and services, and China’s counter tariffs. China’s Commerce Minister, said the US tariffs “are not just firing at the world, but at the U.S. itself”, adding that China has been forced to take countermeasures. The PBoC appeared to calm market nerves saying that the impact on the economy is limited “as the dependence on the outside world is low”. China’s Premier Li also reiterated China’s intention to move ahead with reforming and the opening up its economy to the world, adding that goods coming into the country could be subject to lower tariffs.
Staying with Tariffs, German Chancellor Merkel noted the European car tariffs could be “much more serious” than the metals tariffs, later suggesting that lower car tariffs could be an answer: “talks on…reducing tariffs, for which I’m prepared, can’t only be done with the US….we’ve to do it with all countries with which we have trade in automobiles”. Over the weekend France’s message was more collaborative stating that if the EU nations’ hands are forced it will collectively unite and react firmly. We will continue to monitor the developments going forward, but it is very clear to us that if the US-administration continues with its global tariffs assault, there will be few beneficiaries, and it will weigh heavily on global growth and inflation expectations in the second half of the year.
Also of note was the FOMC minutes from the June meeting. Nearly all participants agreed that a further hike this year is warranted; this has been largely priced in for many months. There was mention of a “very strong” US economy, however, warnings of trade-related uncertainty followed. The main message was that the central bank will remain accommodative and stick to gradual rate rises. The UST curve continued to flatten once again last week, on this, the minutes said “several participants cautioned that yield curve movements should be interpreted within the broader context of financial conditions and the outlook, and would be only one among many considerations in forming an assessment of appropriate policy”. Also, as noted by the minutes, US labour market conditions remain strong, although we did see a mixed June employment report on Friday: unemployment unexpectedly moved up to 4% in June (from 3.8%), and the all-important average hourly earnings nudged lower to 2.7% yoy. There is no doubt that inflation has been creeping in this year, however, the Fed does not appear fully convinced, with the minutes stating that it was too “premature to conclude that the committee had achieved” its 2% target. Thursday’s US CPI reading will, therefore, be watched closely; currently expected at 2.3%.
This week, trade tensions will no doubt remain a focal point for markets, as a relatively light data week following non-farm payrolls is expected. Also of note will be the NATO summit in Brussels, where Trump may receive a frosty reception, and the Fed May draw attention with its semi-annual Monetary Policy Report to Congress due on Friday; Powell will testify the following week. Following May’s softer Brexit proposal, and a number of subsequent resignations, further developments will be monitored closely.
This morning kicked-off with China’s FX reserves which beat expectations, at USD3.112tn. Later Germany’s Merkel and China’s Keqiang meet in Berlin to discuss trade and investment amongst other topical issues, and Turkey's Erdogan will be sworn in. China’s inflation numbers for June will draw attention on Tuesday, CPI is expected at 1.9%yoy. The NATO meeting on Wednesday will see a focus on defence co-operation and “fairer burden sharing”. As mentioned, Thursday sees the US CPI prints. China trade data will hit the screens first thing on Friday which will be watched closely following recent trade tensions. Meanwhile, Mr Trump will be in the U.K. meeting with PM May and the Queen, and he may even bump into the 6m specially designed “Trump baby” blimp.