BMA Market Insights: (RISK-OFF) Trump Makes Trade Threat To China


U.S. Treasury yields and equities tumble in overnight trading after Trump’s trade threat to increase tariffs on $200 billion in Chinese imports from 10% to 25% this upcoming Friday. Trade-related news will likely continue to dominate headlines this week. A number of key economies including China, U.S., Germany, Canada, and Australia are expected to release trade balance data over the five-day period. S&P 500 Futures point to a -1.61% market open and the 10-year UST is down 4.8bps to 2.483% in pre-market trading.

Trade talks between Chinese and U.S. officials are expected to resume this week, even after the recent Trump threats, though details of the delegation to the U.S. are not yet available. It is not clear if China’s Vice Premier Liu will still be in attendance in Washington or if a potential draft of an agreement may still be in the works as early as Friday. Both sides recently noted progress in addressing issues such as access to key markets and how to roll back punitive tariffs.  China has been open to granting access to firms within the automotive, banking, insurance, and securities industries. China has also committed to providing greater transparency on how it manages its currency and purchases of U.S. products such as soybeans and natural gas. Conversely, concerns surrounding Chinese cyber theft and subsidies remain.

Outside of trade-related data and events, investors will pay close attention to global growth indicators including German industrial orders early in the week and U.K. GDP data on Friday.  Both the Reserve Bank of Australia and the Reserve Bank of New Zealand will hold their respective monetary policy meetings this week as well.

Last week, a slew of data hit the markets. Notably, the April U.S. unemployment report surprised to the upside late in the week. The unemployment rate resulted in a five-decade low at 3.6%, versus estimates of 3.8%. However, increases in wages were remarkably subdued, giving way that inflation pressures remain benign (see more below).

Muted inflation pressures kept the Federal Reserve on hold last week. Committee members unanimously voted to keep the key monetary policy rate unchanged at 2.25-2.50%. Officials noted continued strength within the economy, particularly within the labor markets. Further, Chairman Powell appeared less dovish, as he seemed to be less concerned about weak inflation and noted it is likely transient.  

The Fed’s holding pattern coupled with the strong unemployment report boded well for U.S. stock indices. The Nasdaq closed the week at a record high at 8,164. Similarly, the S&P 500 was up about 0.2% and capped the week at 2,945.64. About 400 of the S&P 500 companies have reported earnings, with nearly 75% of those who reported beating earnings estimates. The risk-on sentiment propped up U.S. Treasury yields, with the 10-year hovering near 2.53% at the close. While gains in oil prices were stymied by a mid-week report indicating that U.S. crude inventories were at their highest levels since September 2017, energy prices bounced higher on the back of the strong U.S. data on Friday. WTI crude closed the week at $61.94/barrel.

I.   U.S. Economic Data/Markets

  • April Unemployment Rate dropped to 3.6%, the lowest level since December 1969 as the economy added 263k jobs in the month. Economists expected the unemployment rate to remain unchanged at 3.8%.
    • Professional business services, construction, and health care were among the sectors that added workers last month.
    • Employment in retail fell for the third straight month.
    • Labor-force participation slightly dropped to 62.8% from 63%, but the participation rate is up from a year ago.
    • Hourly wages increased on average six cents, up from four cents last month. The small increase in wages reinforced that wage pressures will not likely result in higher inflation.
  • ISM non-manufacturing index fell to a reading of 55.5 in April from 56.1 in March, the lowest reading since Aug. 2017. Analysts widely expected a reading of 57.5.
  • Factory Orders rose by the most in seven months in March with a 1.9% y-o-y increase compared to expectations of 1.5%. Strong demand for transportation equipment coupled with rising investors contributed to the data.
  • Federal Reserve kept the policy rate unchanged at 2.25%-2.50%. The market largely perceived the sentiment to be slightly more bullish, given the Fed acknowledged that economic growth remained strong. Key takeaways from the meeting included:
    • Noted slower growth in household spending and business investments remain.
    • Continued strength within the labor market.
    • Muted inflation pressures as core inflation remained below the Fed’s 2% target but believed recent. softening of inflation was likely to be transient.
    • Lowered interest on excess reserves rate to 2.35% from 2.40%.
  • Consumer confidence edged higher to 129.2 in April from 124.2 in March.
  • Chicago PMI fell to a two-year low with 52.6 reading in April, down from 58.7 in March.
    • New orders fell for a second consecutive month.
  • Pending Home Sales increased 3.8% m-o-m in March in part due to lower mortgage rates. For example, 30-year mortgage rates averaged about 5% in November and dropped closer to 4% in March.
  • U.S. S&P/Case-Shiller Home Prices indicated a 3% y-o-y increase in prices in February, down from a 3.5% annual increase in January.
  • Personal Spending increased by 0.9% in March versus expectations of 0.7%.
  • March Core Personal Consumption Expenditures index, the Fed’s favored measure of inflation, increased 1.6% y-o-y. The headline number (including food and energy prices) increased by 1.5% y-o-y.

II.  Key Economic Data Outside the U.S.

  • China
    • Caixin Manufacturing PMI underwhelmed markets with an April reading of 50.2, less than estimates of 51 and lower than the March reading of 50.8.
    • China’s NBS April PMI also fell short of expectations coming in at 50.1 versus forecasts of 50.5.
  • Eurozone  
    • Inflation edged higher to 1.7% in April from 1.4% in March. Further, core inflation (excluding food and energy) increased to 1.2% from 0.8%.
    • Unemployment fell to 7.7% in March, the lowest level since September 2008.
    • German Unemployment also dropped more-than-expected in April, falling by 12k compared to forecasts of a 5k drop. The unemployment rate held at 4.9%, the lowest level since German reunification in 1990.
    • German Markit Manufacturing edged higher in April but still reflected a contraction (a level below 50 signals a contraction). April’s level of 44.4 was marginally higher than March’s 80-month low of 44.1. April saw the seventh consecutive month of decline in new orders.
    • First quarter GDP surprised to the upside, increasing 0.4% q-o-q (vs. expectations of 0.3%). Economic activity for the region was in part fueled by lower unemployment, higher wages, and increased consumption.
    • German retail sales fell in March by 0.2% m-o-m on the back of a drop in food, tobacco and drink purchases. Analysts expected a 0.4% drop.
    • German inflation increased 2.1% y-o-y in April, exceeding the ECB’s 2% target for inflation for the first time since last November. Analysts expected a 1.7% increase.
      • Both Eurozone equities and German government yields edged higher on the back of the data – suggesting that market participants may feel that the ECB may have less of a need to be accommodative in regards to its monetary policy.
  • Bank of England left the policy rate unchanged at 0.75% and revised its growth forecasts for 2019 to 1.5% from 1.2%. Other takeaways from the meeting included:
    • Better-than-expected growth for the U.S., China, and Eurozone.
    • Gov. Carney emphasized that interest rates may need to increase faster than the market is currently predicting.
    • Brexit uncertainty continued to weigh on the bank and its potential implications for the economy including productivity.
  • Canada
    • GDP fell by 0.1% in February on the back of a number of sectors contracting, including finance, manufacturing, mining and oil and gas.

Key data/events this week:

  • CNY Caixin Services PMI (Monday)
  • EU/German Markit Services PMI/Composite PMI
  • EU Retail Sales
  • FOMC Official Harker speaks
  • BoC Gov. Poloz speaks
  • AUD Retail Sales/Trade data/Reserve Bank Policy Decision (Tuesday)
  • German Factory Orders
  • CAD Ivey Purchasing Managers Index
  • GBP Retail Sales
  • BoJ Monetary Policy Meeting Minutes
  • NZD Monetary Policy Decision (Wednesday)
  • CNY Trade data
  • Swiss Unemployment
  • German Industrial Production
  • CNY PPI/CPI (Thursday)
  • U.S. Trade  Balance
  • U.S. PPI
  • CAD Trade data/Housing Price index
  • FOMC Official Bostic speaks
  • JPY Overall Household Spending
  • JPY Foreign bond/stock investment
  • German Trade Balance (Friday)
  • GBP Q1 GDP/Trade Balance/Industrial and Manufacturing Production
  • U.S. CPI
  • CAD Unemployment data
  • U.S. Monthly Budget Statement