Equity markets fell overnight after Trump hit out at China for continuing to “ripoff” the US and not buying enough agricultural goods, just as face-to-face trade talks between US and Chinese negotiators resume in Shanghai. The falls, at least in the US markets, have been modest with the market looking ahead to the FOMC meeting tonight. The GBP has stabilised overnight after falling further during the Asian trading session yesterday on no-deal/new election concerns, while the NZD and AUD have continued to move lower. Besides the FOMC meeting, there is a lot happening over the coming 24 hours with the official Chinese PMIs, Australian CPI, European GDP and the US ADP employment index all released.
In what was expected to be a quiet overnight session in the lead-up to the FOMC meeting, a series of Trump tweets on China caused equity markets and bond yields to fall. Trump complained that China “was supposed to start buying our agricultural product now -- no signs that they are doing so. That is the problem with China, they just don’t come through… My team is negotiating with them now, but they always change the deal in the end to their benefit.” He reiterated previous claims that China was continuing to “ripoff” the US. It wasn’t a good sign just as US Treasury Secretary Mnuchin and US Trade Representative Lightziger started new face-to-face trade negotiations with their Chinese counterparts in Shanghai, although market hopes for any major breakthrough are low.
US equity index futures had already been on the back foot before Trump’s latest Twitter outburst following weakness in European indices. The Eurostoxx 600 index fell 1.5% while the German DAX was 2.2% lower on the session. The S&P500 futures contract was 0.85% lower around the time of the cash market open after Trump’s tweets, although the index managed to hold the 3,000 level and it has since recovered most of that earlier fall (currently -0.15% on the day). Energy sector stocks (+1.3%) helped support the recovery in the S&P500 after a near 2% rise in US WTI crude. Investors now look ahead to Apple’s earnings after the market close today and the Fed meeting tonight.
The 10 year US Treasury yield fell 2bps to 2.04% following the Trump tweets, but the recovery in equities alongside stronger than expected consumer confidence data helped yields recover to their previous levels. The Conference Board consumer confidence index was significantly stronger than the market consensus and rose back to near the highs of the current cycle, lifted by both consumers current assessment and future expectations. Evidently, US consumers are more focused on the strength in the stock market (and their 401ks) and the labour market than the ongoing trade war, which has hit the manufacturing sector hard. The survey’s so-called ‘jobs differential’, which measures the difference between those reporting jobs as ‘plentiful’ and those ‘hard to get’, widened to +33.4, also near the highest levels of the highs of the cycle, and consistent with the unemployment rate remaining very low.
Elsewhere, the US core PCE deflator met expectations at 0.2% in June (0.248% unrounded) but revisions to prior months meant the year-on-year pace of inflation was less than expected, at 1.6% (albeit foreshadowed by the advanced Q2 GDP report). Below-target US inflation, even if at least partly due to some transitory factors, has helped bolster the case for the Fed cutting rates, with that first move expected to be 25bps tonight (the market prices a 30bp reduction to the Fed funds effective rate). Assuming the Fed cuts 25bps, the key will be its outlook for future policy, with the expectation that it will signal a willingness to cut rates further in order to “sustain the expansion.” The Fed is also expected to end its balance sheet reduction – so-called ‘quantitative tightening’ this month (earlier than previously planned).
The USD has tracked sideways ahead of the Fed meeting tonight. The USD indices are unchanged, with modest weakness against the EUR and JPY offset by further strength against the GBP.
The GBP followed Monday night’s sharp fall by dropping a further 0.5% during Asian trading hours, with the break below 1.22, for the first time since March 2017, appearing to trigger stop-loss selling of the currency. The GBP has since stabilised overnight. Concerns around a no-deal scenario and new elections continue to weigh on the GBP. UK gilt yields have again outperformed (10y -2bps to 0.63%) as the market starts to place a greater risk to the downside economic scenario of a no-deal and new BoE easing measures (even though BoE Governor Carney has been more cagey about how much policy stimulus the Bank would be able to provide, given the potential inflationary impact).
Ahead of the Q2 Australian CPI release today, the AUD has underperformed, down 0.4% against the USD to 0.6875. The AUD is now approaching its year-to-date lows. Our NAB colleagues look for a 0.4% increase to the RBA’s trimmed mean measure of core inflation (1.5% year-on-year), which is in line with consensus.
The weakness in the AUD has dragged down the NZD, which has fallen 0.3% over the past 24 hours to 0.6615. The NZD has now fallen for four consecutive sessions, and seven of the last eight, since reaching a three and a half month high in the middle of the month. The NZD/AUD moved up to near its recent highs, at 0.9620. The ANZ business survey is released today and we’re not expecting any major pick-up to the activity indicators, which remain at subdued levels.
There was little impact on the JPY from the BoJ meeting, where the central bank maintained its forward guidance that it is committed to keep interest rates at current ultra-low levels "for an extended period of time, at least through around spring 2020." The BoJ added a line that it will take additional monetary easing steps without hesitation "if there is a greater chance the momentum for hitting its price target is lost", with Governor Kuroda saying in the press conference that this line was added to reflect the growing risks, especially offshore.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.