US equities opened the new quarter on a weak note, after yesterday’s public holiday. The futures market had pointed to a weak open after President Trump didn’t back down over the weekend and went ahead with 15% tariffs on about $110b of mainly consumer goods imports from China. Last night Trump rattled off a series of tweets which remained defiant on the trade war, suggesting that a trade deal with China would be much tougher if he wins the next Presidential election and the EU could also be in the firing line – criticising those who suggest he team up with the EU to fight against China with “EU & all treat us VERY unfairly on Trade also. Will change!” In other trade war related news, Huawei accused the US government of orchestrating a campaign to intimidate its employees and launching cyber-attacks to infiltrate its internal network.
All this came out before the US ISM manufacturing report which was a shocker and a market mover. The headline index fell to 49.1, much weaker than market expectations for a flat result at 51.2, with new orders plunging to its equal-lowest level since the GFC. The consensus was always looking too optimistic, given the steer by the Markit US PMI released earlier in the calendar and escalation of the US trade war through August, not once, but twice. The consensus was sucked in by the more positive regional surveys which provided a poor guide this month. The message of the survey is clear – that the US manufacturing sector is suffering under Trump’s tariff policy, as is much of the rest of the global manufacturing sector, given the hit being directed towards a key player in the chain, China.
The poor data increased the chance of further Fed easing and might increase the chance of Trump backing down on the trade war – but we’d likely need to see further evidence of the US economy heading perilously towards economic recession and a big fall in US equities for Trump to capitulate to save his re-election chances.
The S&P500 is currently down about 1% while US Treasury rates are down 3-5bps across the curve, with the 2-year rate down 5bps to 1.46% and the 10-year rate down 3bps to 1.46%, after earlier dipping to a multi-year low of just under 1.43%. The data solidified expectations that the Fed will ease policy at its next meeting in two weeks, with a 25bps cut fully priced and a small chance of a larger 50bps cut.
The USD has been knocked off its perch by the data, with the DXY index down almost 0.5% from the multi-year high reached last night. The NZD was weaker through the local trading session, extending down to 0.6270 largely reflecting broadly based USD strength at the time, but has showed a decent recovery to 0.6325. The GDT dairy auction price index fall of 0.4% was line with expectations, with whole milk powder down 0.8%.
The AUD followed the same path yesterday, with the first recorded quarterly current account surplus since 1975 being ignored, and soft retail sales data released at the same time dampening any enthusiasm to pile into the currency. The RBA left its policy rate unchanged at 1% and broadened its easing bias beyond its hitherto focus on labour market developments – probably not wanting to put undue emphasis on the labour market when global developments are proving just as important at the present juncture. The AUD has trended higher since and sits this morning at 0.6760. It slight outperformance sees NZD/AUD nudge down to 0.9360.
GBP has been all over the place, with any trader in the currency deserving of the moniker “steel balls” given the uncertain path towards Brexit. It fell to a fresh low just below 1.1960 before recovering strongly to breach 1.21 earlier this morning on the back of USD weakness and some optimism that Brexit’s fate will soon be out of Boris Johnson’s hands.
Boris Johnson lost his slim majority in Parliament with the defection of one of his Conservative MPs Phillip Lee, who crossed the floor to sit with the Liberal Democrats. Lee told reporters that he expects more defections. The odds slightly increased the chance of Johnson losing a vote of no confidence, although he could still get support from a number of Independent MPs in such a vote. UK Parliament re-opened today after the summer recess with the main event on the card being a debate on Brexit. Later this morning NZ time, this could culminate in the government losing control of the Parliamentary agenda, paving the way for legislation that blocks a no-deal Brexit. The calling of a snap election could then be called tomorrow, with Johnson saying earlier this week that he would rather risk losing office than have his negotiations with the EU undermined.
EUR is flat for the day at 1.0970, recovering earlier weakness as the USD fell away. The ECB’s Muller joined a growing chorus of Governors sceptical of the merits of further quantitative easing, saying a resumption of bond purchases now would be “disproportionate in a situation where there is no deflation risk”, and there is also a concern over “ineffectiveness”. Reuters reported that ECB sources claim policymakers are leaning towards a rate cut and tiering with reinforced guidance – no mention of further QE there.
The NZ rates market showed little movement again yesterday, but downward pressure should be exerted from the open after the US Treasuries movement overnight.
In the day ahead a number of Fed Presidents are on the speaking circuit including Williams tonight. The Bank of Canada is expected to keep rates steady, but the market will be attune to any dovish comments consistent with a possible first easing for the cycle later in the year. Australian Q2 GDP data are released and are expected to show sub-trend growth.