Morning comment: Trump on trade, Economy watchers & NAB surveys

Chris Scicluna
Mantas Vanagas

After China announced its retaliation in the trade war – with plans to raise tariffs to up to 25% on $60bn of imports from the US – risk appetite was thin on the ground yesterday with the S&P500 eventually closing down 2.4% and the NASDAQ down 3.4%. The flight to quality pushed yields on 10Y USTs at one point below 2.40% to approach their March lows while the market-implied probability of a cut in the fed funds rate before year-end rose to around 75%. And while equity markets in Europe did not fare quite as badly as those in the US, 10Y Bund yields also took another step down, to below -0.07%.

As expected, the Office of the US Trade Representative also subsequently released its own new list of Chinese goods worth some $300bn threatened with a 25% tariff. The mood calmed somewhat as Trump stated that he would meet Xi Jinping (and Vladimir Putin) at the end-June G20 Summit and reported “a feeling” that the rendez-vous  would be “very successful”. So, Chinese equity markets avoided another major rout today, although a late slide saw the CSI300 close down 0.6%. Elsewhere, Korea’s KOSPI closed up 0.1%. But losses predominated elsewhere. While the Hang Seng played catch up after yesterday’s break, declining about 1.7%, declines in most other major stock markets in the region were more moderate. Most notably perhaps, while the yen reversed yesterday’s appreciation against the dollar, the Topix closed down 0.4% as the latest Economy Watchers survey suggested no significant improvement in business conditions at the start of the second quarter.

Nevertheless, US equity futures are pointing higher today, while yields on US Treasuries are also up from yesterday’s lows. And yields on ACGBs largely reversed their initial declines even as the latest Aussie NAB business survey largely suggested a further loss of momentum, including in the labour market, at the start of Q2 (see below). Looking ahead, politics will remain front and centre in the UK, as Theresa May’s cabinet debates next steps for Brexit, while the dataflow focuses on the UK labour market, euro area IP, and US small business confidence and traded goods prices.

Most notable among the latest Japanese economic data released overnight was the Cabinet Office’s Economy Watchers survey for April. And, after the Government yesterday assessed the economy to be “worsening” – the second weakest out of its five grades – for the first time since 2012-13, today’s survey suggested no significant improvement at the start of Q2. Admittedly, having declined in March to its lowest level since July 2016, the headline current conditions index ticked up 0.5pt, but at 45.3 this was still the second-weakest reading in almost three years, and well below the key-50 ‘improving’ level. Most components of the current conditions index posted modest improvements, but all remained firmly in contractionary territory. And the forward-looking components of the survey pointed to ongoing expected deterioration, with the headline outlook index down for the third successive month to a four-month low of 48.4, closer to the bottom of the range of the past three years and led by a worsening of assessments of corporate sector demand, in particular in manufacturing, and employment conditions.

While a new YouGov poll yesterday showed the Conservatives languishing in fifth place in voting intentions for next week’s European Parliament elections, there was no surprise last night that yesterday’s talks between the Government and Labour party ended with no progress. But to give the impression that the time provided by the UK’s Article 50 extension is not being wasted, chief Brexit negotiator Olly Robbins will return to Brussels today, ostensibly for discussions on how the Political Declaration might possibly be amended in response to any outcome from the cross-party negotiations. And Theresa May’s Cabinet will this morning discuss (the lack of) traction in the talks with Labour, with suggestions that she is preparing imminently to submit the Withdrawal Agreement Bill (the domestic legislation required to implement Brexit) to Parliament – minus the all-important Irish backstop clauses – for a (substantively pointless) vote, to give the impression of progress and justify her continuation as Prime Minister. Reportedly, options for scenarios to be considered by MPs in a new round of “indicative votes” will also be discussed this morning.  

Data-wise, today brings the most notable new UK economic report of the week in the shape of the latest labour market figures. While business sentiment surveys suggested some weakening in the labour market, jobs growth remained strong in the first two months of the year, reporting increases of 222k3M/3M and 179k3M/3M respectively. A further moderation in growth to around 140k3M/3M is anticipated this time, but that level would still be above the average rate of the last twelve months. Meanwhile, the three-month unemployment rate should remain unchanged at 3.9%, the lowest since the mid-1970s, for a third consecutive month. Having risen steadily over the past year, the claimant count is also expected to remain unchanged at 3.0%. But growth in average weekly earnings might inch slightly lower from the post-global-financial-crisis high of 3.5%3M/Y seen in the previous three months.

Euro area:
Today’s euro area data focus will be industrial production figures for March. We already know that output was down in France, Italy and Spain but up in Germany. So, euro area IP (excluding construction) is likely to have fallen by a little less than ½%M/M. But thanks to a strong rebound growth at the start of the year, that would imply a rise in output of about ½Q/Q in Q1 despite the marked deterioration in survey indicators from the sector over the course of the quarter. Nevertheless, we expect the rebound in production to be short-lived and anticipate a much weaker performance in the sector in Q2.  Other data due today include the German ZEW survey of investor sentiment for May. In the bond markets, Italy will sell 3Y and 7Y BTPs.

Meanwhile, final figures of April inflation in Germany and Spain, already released this morning, aligned with their flash estimates. So, German inflation on the EU-harmonised measure rose 0.7ppt to a five-month high of 2.1%Y/Y and Spanish inflation on the same basis rose 0.3ppt to 1.6%Y/Y, likewise the most since November. The increases in both countries appear to be driven by prices of tourism-related services (prices of package holidays were up about 11%Y/Y in Germany) and other items affected by the timing of Easter. And so we expect significant declines in May as that impact wears off. 

While the general election continues to dominate in Australia ahead of the weekend’s vote, after yesterday’s home-loan data pointed to ongoing deterioration in the housing market today’s NAB business survey for April  suggested ongoing loss of momentum more widely in the economy. Having slipped into negative territory in March for the first time since July 2013, the headline business confidence index edged slightly higher last month, rising 1pt to zero. This, however, represented the first improvement in nine months. But the closely-watched business conditions index was still down 4pts to +3, the joint lowest level in the last few years. And other main sub-components were disappointing too. Respondents were slightly more downbeat about trading conditions, profitability and the outlook for capex. And, most importantly given the RBA’s current strong focus on developments in the labour market, the employment index dipped below zero for the first time since the beginning of 2016, to -1. Firms also indicated some weakening in terms of underlying price pressures in the economy, with labour cost growth inching lower to 0.5%3M/3M, the weakest rate reported since 2015, and final product price inflation easing to 0.2%3M/M, the weakest since 2016. Nevertheless,  the survey suggested that, so far, retail price inflation has not been affected, with that rate of increase inching up to an eight-month-high of 0.4%3M/3M.

The week’s US dataflow gets underway today with the NFIB small business optimism indices for April and import and export price indices for the same month.


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