Hope for an interim US-China trade agreement or détente that averts further tariffs alongside hope that a Brexit deal might be achievable after all have fuelled a rise in risk appetite. Equity markets are higher and UST10s are up 6bps, while safe-haven currencies have underperformed. GBP is up over 1.7%.
US-China trade talks remain a focus for the market. That was evident yesterday when S&P futures during the NZ trading session moved plus or minus at least 1% on four occasions based on various, at times conflicting, headlines on the topic. The current vibe is positive, especially after President Trump confirmed that he would meet China Vice-Premier Liu at the White House tomorrow.
On the positive side, yesterday Bloomberg reported that the White House was looking at rolling out a previously agreed currency pact with China as part of an early harvest deal that could also see a tariff increase next week suspended. The report reignited the idea of an “interim deal”, with the contentious issues like intellectual property and forced technology transfers left to future negotiations. Adding to the positive vibe, the NY Times reported that Trump gave approval for licences allowing US companies to supply non-sensitive goods to Huawei.
Whether or not the positive vibe can be sustained will all come down to Trump’s meeting tomorrow. He has previously said that he wasn’t interested in a partial deal, but that was before the impeachment inquiry got underway. Trump needs a “win” and more energy to devote to his political survival than a trade war distraction.
US equities have been sensitive to trade war headlines, as noted above, and the S&P500 is currently up 0.5%, adding to yesterday’s 0.9% gain. The risk-on mood sees US rates higher across the curve, despite US CPI data coming in softer than expected. The core rate rose by just 0.1% m/m after a run of three monthly increases of 0.3%. The data kept alive the chance of another Fed rate cut at the end of this month but the decision will remain dependent on the flow of data over the next three weeks. Jobless claims unexpectedly declined to a three-week low, challenging the idea that the US unemployment rate is on the verge of turning higher.
Higher US Treasury yields (up 5-6bps across the curve) likely reflect some closing of short positions, ahead of a possible trade war détente. The escalation in the trade war has been a key risk for the global economy and Fed policy will be sensitive to trade war developments from here. A prolonged détente would remove a key downside risk to the global (and US) economy.
The other risk-positive event over the past 24 hours has been Brexit news. UK PM Johnson and Irish Premier Varadkar met and issued a joint statement saying “they agreed that they could see a pathway to a possible deal”. Varadkar later told reporters that while obstacles remain he hopes the progress will be enough for formal negotiations to restart in Brussels. The Irish Times reported that there was “very significant movement” from Johnson on the customs issue, with no further detail provided. The positive vibe has raised some hope for a chance of a Brexit deal ahead of the EU summit at the end of next week.
GBP is up strongly on this development and is currently up 1.8% to 1.2420, pushing NZD/GBP back below 0.51. As usual, GBP remained more sensitive to Brexit news than UK economic data, which weren’t market moving. UK GDP data were strong enough to suggest that the economy likely avoided recession – after the contraction in Q2, the Q3 figure is on track for a small positive – but industrial production was much weaker than expected in August, highlighting the struggles for the manufacturing sector.
The risk-on mood sees the safe-haven currencies CHF and JPY weaker, while USD indices are down 0.4%. The AUD is up 0.5% from this time yesterday to 0.6765. The NZD’s tight range evident this week extended a little, as it reached a high of 0.6335 last night, helped by a slightly stronger yuan. Overall, currency markets have been less sensitive than equity futures to the oscillating trade war news headlines. The NZD currently sits at 0.6325, little changed from where it ended last week.
ANZ’s NZ monthly inflation indicator was strong enough to suggest that non-tradeables CPI probably rose by at least 1.0% q/q in Q3 and taking annual inflation in the sector above 3%, which would be the highest rate since 2011. Based on the strength of domestic inflation pressures and the very tight labour market, the only logic for further RBNZ easing would be if the outlook is so dire that lower interest rates are required to keep fuelling the fire. The data certainly questioned the pricing of November OIS, which fully prices a 25bps cut, with a 10-15% chance of a larger 50bps cut. The data had little impact on the market, with the 2bps increase in yield across the swap curve and 3bps increase across the government curve largely reflecting global forces.
The day ahead will be determined by what headlines we get on US-China trade talks. It should be a quiet day in the absence of any leaks, with focus on the Trump-Liu meeting tomorrow and a statement that might follow. Monday’s NZ open could be interesting. Domestically, the PMI will be of interest after its recent fall into contraction territory and tonight sees the release of the University of Michigan consumer sentiment figures, which are expected to show a further decline in confidence.