US-Mexico negotiations continue and the threat of tariffs hasn’t perturbed the equity market, with US equities rising for their third consecutive day. The USD is on the soft side, with EUR leading the way after the ECB didn’t meet the uber-dovish expectations of the market. Bond yields have only shown small movements ahead of the US payrolls report tonight.
Yesterday’s news following the first day of US-Mexico trade and migration talks didn’t look good, with no agreement reached. Talks continued today, although vice-President Pence would not be attending. An aide to Trump told Fox News that Mexico was not offering enough to avert tariffs and “we’re moving toward path of Mexico tariffs”. Trump told reporters that Mexico had “to step up to the plate” else tariffs will go on. Bloomberg reports that the US is considering delaying Trump’s threatened tariffs on Mexico as talks continue, with Mexico pushing for more time – quoting one US official saying that the most likely outcome is still that a 5% tariff goes into effect but US negotiators recognise that Mexico is taking the talks seriously and working quickly to address Trump’s concerns. “If the 5% tariff is triggered but Mexico follows through on promises to crack down on migration, the duties could be short-lived”. On the US-China trade war, Trump said that he’ll make a decision on whether to impose tariffs on another $325m of Chinese imports after the G20 meeting at the end of the month.
The S&P500 is currently up 0.5% after gaining 3% over the previous couple of sessions, seemingly unperturbed by surrounding trade wars. The USD is on the soft side again, with EUR leading the charge.
The ECB extended forward guidance on rates, pledging that it would keep its policy rates at their present levels “at least through to the first half of 2020” (previously through to the end of 2019), while growth and inflation forecasts for next year were nudged lower. The ECB also outlined the details of its latest cheap long-term loans to banks that begin in September, which will be less generous than those applied to the previous programme. As far as the market was concerned President Draghi’s messaging wasn’t as dovish as expected, with him not seeing “any substantial deterioration in outlook” since the ECB’s last forecast update in March. While he indicated the Bank was determined to act as needed, he also noted that the economic data in the region aren’t bad. Draghi noted that some officials raised the possibility of rate cuts and restarting QE, but clearly they were out-numbered.
EUR rose up through 1.13, a near two-month high, and has since peeled off to 1.1270. Germany’s 10-year rate rose as much as 4bps to minus 0.19%, but has reversed that move and is back to its record low rate of minus 0.24%. The US 10-year has traded a tight 2.09-2.12% range overnight as the market awaits the key non-farm payrolls report tonight, where the market expects reasonable employment growth of 180k after the strong gain in April, but the “whisper” number will be a lot lower after the shockingly low private sector ADP employment figure released Wednesday. With trade wars simmering in the background, a strong figure is likely to be discounted while a weak figure would help fuel support for rate cuts. NY Fed President Williams joined the party of FOMC officials that have adopted an easing bias, giving a nod to current market pricing for rate cuts in suggesting that is was “important for us to keep an open mind….may need to keep rates same, may need to adjust them”.
For the third morning in a row, the NZD is hovering around 0.6620, after meeting some resistance just under 0.6645 overnight, while NZD/AUD is steady around the 0.95 mark. The stronger EUR sees NZD/EUR slip to 0.5880, while there has been little change in the other key crosses. Yesterday, the NZ swaps market showed little change, with government rates mostly nudging down by 1bp.
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