BMA Market Insights: Safe Havens in Demand as the Trade War Intensifies

The RISK-OFF sentiment continues as ongoing concerns surrounding the global economic impact of the trade war will have investors scrutinizing the release of EU GDP data, German Industrial Production and Factory Orders scheduled for both the U.S. and Germany. Friday brings us May U.S. employment data. While the slight pick-up in inflation data last week (see more below), reinforced the Fed’s sentiment that low inflation may be transitory and reaffirmed the current policy to keep rates on hold, any signs of a less than robust employment data may, however, incite the Fed to reconsider its current monetary policy stance. The U.S. 10-year Treasury price is up +0.157 to 102.305, yield lower by -1.8bps to 2.116%.

In fact, the Fed is holding a two-day conference this week to discuss how it may better approach its dual mandate of stable inflation and full employment. Both FOMC Chairman Powell and Official Clarida are scheduled to speak on “Monetary Policy Strategy, Tools and Communication Practices” on Tuesday and Wednesday respectively. Prior to the conference, Fed Official Quarles will discuss the “Next Stage in the LIBOR Transition” on Monday.

Later in the week, the European Central Bank will take center stage to opine on its monetary policy. The market largely expects the bank to keep its lending facility rate unchanged at 0.25%, with a greater interest in any changes in the bank’s economic forecasts to be released post meeting. ECB officials recently indicated that the bank will also likely explore its options on how it may support the bloc’s economy and may potentially disclose further details regarding its targeted longer-term refinancing operations (TLTROs).

Last week, U.S. consumer confidence surprised to the upside, suggesting consumers may be undeterred by trade squabbles. Nevertheless, trade tensions continued to mount as China threatened to blacklist foreign firms, groups, and individuals that may harm the interests of Chinese companies. Further, President Trump added to trade tremors by threatening a 5% tariffs on Mexican imports if Mexican officials do not stop “illegal migrants” coming into the U.S. Mexico is one of the U.S.’s largest trade partners, the two parties exchanged about $612 billion in goods last year. If tensions between the U.S. and Mexico escalate, some market practitioners have forecasted as much as two rate cuts by the Fed later this year.

Continued trade concerns coupled with disappointing manufacturing data out of China, sparked the market to sell off. The global RISK OFF sentiment pushed German 10-year yields to -0.20%, the lowest on record. Similarly, Treasury yields fell, with 10-year yields dropping below 2.2% for the first time in 20 months on Friday. The bond closed the week with yields hovering at 2.137%. The stock markets took a beating as well, as the S&P 500 fell to a 12-week low, the index closed the week at 2,752.04. Finally, oil prices also retreated on the back of trade jitters with WTI crude capping the week at $53.26/barrel, the lowest level since February.

I. U.S. Economic Data/Markets

The final reading of Michigan Consumer Sentiment in May fell to 100 from 102.4, the drop was largely due to increased trade tensions.
Personal Consumption Expenditures Price Index, rose a seasonally adjusted 0.31% in April from March and 1.51% from a year ago.
- Core PCE (excluding food energy) increased by 0.25% from March, the fastest monthly pace since October 2016 and 1.57% from last April.
Fed Official Clarida felt rates are right where they should be given the current economic environment.
- Should inflation remain below the Fed’s target of 2% and global economic prospects dim, it may warrant the Fed to cut rates.
Chicago PMI increased to 54.2 in May from 52.6 in April.
April Pending Home Sales disappointed expectations falling 1.5% m-o-m versus forecasts of a 0.9% increase. April reflected the 16th straight month of annual declines, with a 2% drop y-o-y.
Q1 GDP was revised slightly downward to 3.1% from an initial reading of 3.2%.
Richmond Fed Manufacturing Index rose to 5 from 3 in April, versus expectations of 5.5.
- Respondents were optimistic about growth in spending and business conditions in the coming months.
- Positive sentiment surrounding growth in employment and wages over the next few months.
S&P/Case-Shiller Home Price Index reflected weak housing price gains in March with a 3.7% y-o-y increase versus a 3.9% price gain in February.
Consumer Confidence surprised to the upside climbing to 134.1 in May versus forecasts of 129.5. The data suggested that consumers may be undeterred by the China/U.S. trade spat and given employment levels remained robust – consumer spending may pick-up at least over the next few months.

II. Trade

China/U.S. trade tensions remained elevated as China halted its purchases of U.S. soybean last week. China has also threatened to cut off its rare earth mineral supply to the U.S., a key material in the tech supply chain in retaliation of the Trump Administration blacklisting Chinese tech juggernaut Huawei Technologies.
- Chinese officials threatened on Friday to unveil a list of “unreliable” foreign firms, groups and individuals that harm the rights and interests of Chinese companies – no names have been announced as of this writing.
Mexico/U.S. – the Trump Administration sparked trade tensions with Mexico by threatening 5% tariffs on all Mexican imports starting June 10, with a potential rise to 25% in October unless Mexico halts “illegal migrants” heading to the U.S.

III. Non-U.S. Economics

Eurozone Economy
- The German Unemployment rate rose to 5% in May from 4.9% in April, the first monthly increase since November 2013. The unemployment rate, however, still remained low, to levels not seen since the reunification in 1990.
- German Inflation slowed in May, rising 1.4% versus 2% in March.
- German Retail Sales surprised to the upside rising 4% y-o-y in April after a 2% drop in March.
Chinese Economy
- NBS Manufacturing PMI fell to 49.4 in May from 50.1 in April. Weak new orders coupled with a drop in exports drove the data.
Canadian Economy
- Bank of Canada left the key rate unchanged at 1.75%, as expected. Recent data seemed to have reaffirmed the bank’s expectations that an economic slowdown last year into early 2019 was temporary.
  - While trade tensions with the U.S. have dragged on Canadian exports, the recent tariff lift on aluminum and steel will bode well for the economy.
  - A pick-up in consumer spending and low unemployment data will also serve as a boon to the economy, particularly in the second half of the year.
  - Unlike previous statements, there was no mention of concerns surrounding household debt
  - The next bank policy meeting is scheduled for July 10.
- GDP increased 0.5% m-o-m in March above forecasts of 0.3%.
Japanese Economy
- Core CPI rose 1.1% y-o-y.
- The unemployment rate fell in April to 2.4%, a 0.1% drop from March.
- Industrial production rose 0.6% m-o-m in April.
  - An increase in production of cars and airplane parts drove the data.