Markets pay very close attention to nuances in language and tone by both central bankers and politicians. Subtle shifts in the use of language or actions can change the dynamics for the markets instantaneously as markets are always forward looking and respond immediately to news headlines or tweets. We got a taste of that this past week as the messaging from the White House has shifted regarding trade negotiations with China; emerging markets have rallied and the U.S dollar weakened.
The U.S. has key elections this year, Canada will have elections next year, and President Trump and PM Trudeau will be under the microscope regarding their respective NAFTA negotiations. Regarding the U.S-China trade disputes, President Xi of China does not have to face his electorate in the same way that President Trump or PM Trudeau does; President Xi can play the long game and can afford to ride out short term economic and political storms.
President Trump has more pressure to try and make progress on the U.S.-China trade front and on NAFTA as the November elections are just around the corner. President Trump’s comments in March that “trade wars are good and easy to win” have proven more difficult to achieve desired results as our trading partners have dug in. In the short term, there have been negative downstream effects for U.S. importers and exporters as reciprocal tariffs from China and the EU are beginning to bite into growth prospects and profits and could impact the November election.
The bottom line is that all of these leaders want to try and achieve win-win situations for themselves and for their countries. Political messaging, tone, language etc. will all play key parts in these negotiations as investors react to each news headline and tweet. As we have all been witnessing over the past few years going back to the Brexit vote, markets can turn on a dime on economic news as wells as on political outcomes.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to remain unchanged at 0.90%
Expectations for rates to remain unchanged at -0.10%
Expectations for rates to remain unchanged at 1.50%
Expectations for rates to remain unchanged at 6.50%
Expectations for rates to remain unchanged at -0.75%
Expectations for rates to remain unchanged at 6.50%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
U.S. Housing Starts
Expectations for a rebound to 1,231k from 1,168k
Existing Home sales
Expectations for a gain to 5.38m from 5.34m
U.S. Manufact. PMI
Expectations for a gain from 54.7 to 55.0
Expectations for a gain of 0.2% following a 0.5% print
Expectations for a gain of 0.2%; YoY drops to 2.0%
EZ Manufact. PMI
Expectations for near unchanged at 54.6
Germany Comp. PMI
Expectations for a slight decline to 55.4 from 55.6
Expectations for a gain of 0.5%; YoY to 2.4%
Asia/Japan, and New Zealand
Japanese Trade Data
Expectations for a slight widening of the deficit
Japanese Nat’l. CPI
Expectations for the YoY to increase from 0.9% to 1.1%
Japanese PMI Manuf.
Expectations for a near unchanged print of 52.5
New Zealand GDP
Expectations for a gain of 0.8% QoQ; YoY falls to 2.5%
The euro had a good week on the back of improving sentiment regarding U.S.-China trade talks, improvement in many of the emerging market indexes, and a less-dovish ECB meeting. While in a new range relative to the previous weeks, we are not sure if we will again move sideways and consolidate in a slightly different range.
The GBP also had a good week piggybacking the stronger euro and also on the back of more upbeat dialogue regarding the Brexit negotiations. Again, like the euro, we are not sure if we are just in a different range and will begin to consolidate again.
The JPY was the only major currency to weaken last week. Improving sentiment regarding trade negotiations and rising U.S. interest rates caused flight from this safe haven currency relative to its peers. Expect more sideways trading with a slight bias toward more JPY weakness.
The CAD started last week on an upbeat footing regarding the more positive tone regard the NAFTA talks, the U.S.-China trade negotiations and an overall weaker U.S. dollar. However, toward the end of the week the CAD lost momentum and is back into the middle of the last week’s range. Expect more sideways trading this week.
The CNY has consolidated over the past month after a period of sharp weakness. The improving tone regarding emerging market currencies and the apparent re-starting of U.S.-China trade talks last week has little impact as the currency has continued to trade in narrow ranges. Expect more of the same.
The AUD appears to have put in a short term bottom after months and months of declines. Renewed optimism surrounding the U.S.-China trade negotiations combined with an improving tone in the emerging market sector has helped to change short term sentiment. An improving Aussie jobs report added to this mix. It is too soon to evaluate whether the worst is over for the AUD; expect further consolidation this week.
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