Assessing the global economy has become a game of whack-a-mole with trade issues popping up all around the world. Given recent actions and nationalistic rhetoric, further escalation or a prolonged standoff is now more likely. Here’s a summary of where we are.
The 3 mo/10 yr yield curve has inverted again and stoking fears of a recession. While the predictive power of this measure is unclear and we don’t think a recession is imminent, the Fed does monitor this part of the curve. Trade war concerns remain a headwind and the White House’s recent tariff action against Mexico pushes against the narrative that the US is seeking to settle trade talks with allies and focus on China. However, there remains strong opposition to tariffs on Mexico and Trump could reverse course.
Nevertheless, USMCA ratification is at risk and points to elevated risks to trade talks with not only China but also Japan and the EU. As such, the markets are increasingly pricing in Fed rate cuts due to further slowdowns in global growth. Speaking of monetary policy, the Fed will be holding a conference from June 4-5 on monetary policy that could provide further insights into a change to its inflation target.
The ECB meets this week and a dovish Draghi is expected. Tiering deposits will be a key area of discussion and, if realized, opens the door for further rate cuts. Trade wise little progress has been made between the US and EU. While the delay in auto tariffs is a positive, the probability of tariffs ultimately being imposed remains unchanged. Notably being made in America might not be good enough. The Section 232 report says that US national security depends on the American-owned auto sector. This implies the domestic production of foreign makes could be subject to tariffs.
There appears two possible paths for the tech war between the US and China. The US issue with Huawei could be a replay of ZTE that ultimately resulted in a resolution. Conversely, this could be a tip of the iceberg moment as the Commerce Department has a list of “emerging” technologies that could be subject to additional controls and restrictions. Regardless of the outcome, uncertainty in the tech sector appears to be here for an extended period.
The uncertainty impact grows each time a new sector gets pulled into the trade war and each time an expected deal is delayed. The danger of a policy accident is also rising. Even if deals are ultimately struck, it shouldn’t be discounted that the damage done could be “terminate damage” with weak business confidence, deteriorated country level relationships etcetera continuing to persist. Expect the unexpected.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for a 0.25% rate cut to 1.50%
Expectations for the deposit rate to remain unchanged at -0.4%
Expectations for rates to remain unchanged at 3.0%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
US Manufacturing PMI
Expectations for a 50.7 print
US Services PMI
Expectations for a 50.9 print
US Non-farm Payroll
Expectations for a 185k jobs gain
Canadian Jobs Report
Expectations for a 5k jobs loss
EZ Manufacturing PMI
Expectations for a 47.7 print
EZ Core CPI
Expectations for a 0.9% rise
EZ Services and Composite PMI
Expectations for a 52.5 and 51.6 print respectively
EZ Q1 GDP
Expectations for a 0.4% QoQ gain
UK Manufacturing PMI
Expectations for a 52.0 print
UK Services and Composite PMI
Expectations for a 50.6 and 50.7 print respectively
German Manufacturing PMI
Expectations for a 44.3 print
German Services and Composite PMI
Expectations for a 55.0 and 52.4 print respectively
Asia/Japan, and New Zealand
Chinese Services PMI
Expectations for a 54.2 print
Australian Retail Sales
Expectations for a 0.2% gain
Australian Q1 GDP
Expectations for a 0.4% QoQ gain
The ECB meets this week. Rates will remain unchanged but markets will be watching what happens to other elements of the ECB’s policy toolkit. Ultimately the economic picture in the EZ remains challenged given its large exposure to global trade. Tariff threats on Mexico and raising the stakes on currency manipulation opens new fronts to the trade war and foreshadows a prolonged trade battle. Expect the euro to remain pressured.
PM May’s resignation should come this week so focus should be on who will be her successor. The expectations are for a more pro-Brexit leader however both extremes—no deal Brexit and no Brexit at all—have been gaining support. Expect the GBP to remain under pressure, but uncertainty remains high, and be headline driven as a second referendum/new elections may be the only way to break the deadlock.
Risk-off flows into the safe haven yen have made the JPY the G10’s top performing currency since the beginning of the month. US actions with Mexico and modifications to the Treasury department’s exchange rate report illustrates the US’s willingness to expand the scope for which it will use tariffs and raises concerns of a deepening trade war. With both the US and China increasingly entrenched in their respective positions, expect resilient safe haven demand.
The BoC delivered a fairly neutral meeting last week, but flagged increased risk from trade concerns. As a commodity currency, the CAD is exposed to global growth dynamics. Expect the CAD to continue to be influenced by overall market risk sentiment. Bias for range bound to weaker trading.
Market indications are increasingly pointing to an extended period of trade tensions between the US and China with nationalist rhetoric increasing. As such, the CNY has been one of Asia’s worst performing currencies on the month as China is seen as being hurt more than the US during a trade war. Dollar strength and further easing from China should further weaken the currency. Reports have circulated that China isn’t keen to see USDCNY weaken beyond 7, and there appears evidence of support over the past couple of sessions. However, it remains to be seen how strong this defense will be if Chinese market measures remain stable.
Trade tensions and monetary policy concerns have pushed the AUD lower. The RBA has indicated that the labor market would be a key factor in its future rate path. To this end, the most recent employment report showed an increase in the unemployment rate which has fueled speculation that this week’s meeting will result in a rate cut. Continued downward pressure is expected, however market positioning could limit the move.
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