NZD is top of the leaderboard yet again, hitting 0.67, although currency movements have been small ahead of the crucial Trump-Xi meeting tomorrow; US equities are up modestly, while UST yields have trended lower

The NZD is top of the leaderboard yet again, hitting 0.67, although currency movements have been small ahead of the crucial Trump-Xi meeting tomorrow. US equities are up modestly, while UST yields have trended lower.

There are conflicting stories about what will be the outcome of tomorrow’s crucial Xi-Trump meeting at the G20 summit. Bloomberg reporters speculate that the US and China are headed for an uneasy trade-war truce and will return to the negotiating table. However, this would be difficult to achieve if the WSJ story is right, that China is insisting on a number of preconditions before coming to a trade war truce – that the US remove its ban on the sale of US technology to Huawei, the US lifts all punitive tariffs and drops effort to get China to buy even more US exports. The story adds that President Xi isn’t expected to make big concessions at his meeting with Trump. These stories follow a South China Morning Post article published yesterday afternoon that the US and China have tentatively agreed to another trade war truce in order to resume talks. By contrast, a senior US administration official reported earlier this morning that nothing has been agreed ahead of time and that it is unlikely that the US would agree to lift restrictions on Huawei.

So plenty of fake news out there and we are none the wiser.  The market seems to be taking an optimistic view that the outcome will be some sort of trade war truce, with Trump not going ahead on his threat of further tariffs. The S&P500 is up 0.5%, while the NZD and AUD have been the best performing major currencies over the past 24 hours, although gains have been small.

The NZD has risen for the ninth consecutive day, up 0.3%, breaking through some technical resistance at 0.6680 and is now hovering around the 0.67 mark. The AUD has broken up through 0.70, while NZD/AUD has nudged up to 0.9570. Other major currencies have barely shown a pulse, seeing NZD crosses slightly higher across the board.

There was little hope that the ANZ business outlook survey would show any recovery in confidence and activity and that proved to be the case. So the removal of a capital gains tax off the agenda and a rate cut in May has done little to improve sentiment. Current survey indicators are consistent with the RBNZ’s messaging this week of the risk of “ongoing subdued domestic growth”, although we have long argued that cutting rates will do little to drive an economic recovery or sustained inflation. Negative interest rates in parts of the world are testament to that.

Economic indicators released overnight haven’t deviated too much from expectations.  Of note, euro-area economic confidence – a composite of business and consumer confidence – fell by slightly more than expected to its lowest level in three years. Germany’s CPI inflation remained unchanged at 1.3%. In the US, the Kansas City Fed manufacturing index slipped to zero, making it the fifth regional Fed survey to deteriorate this month, and setting the scene for a weaker ISM manufacturing index next week.

US Treasury rates are down 3-4bps across the curve, with the 10-year rate drifting lower throughout the US session to current sit around 2.01%, perhaps reflecting some nerves ahead of the G20 summit and the risk of a very weak ISM report next week. NZ rates were higher across the curve yesterday in response to the upward pressure in global rates seen during the previous session.

Ahead of the Xi-Trump meeting we wouldn’t expect the market to do much, but on the economic calendar US personal income, spending and PCE deflators will be of some interest.  The core PCE deflator is expected to drop to a fresh low of 1.5% y/y, forewarned by soft CPI data released earlier this month.