China strikes back
The Bank of England’s (BoE) Deputy Governor Ben Broadbent maintained the party line when stating interest rate increases will be gradual. On the political front, there were no substantial developments but pressure remains for Brexit talks between the government and the Labour Party to be curtailed. Theresa May indicated that another round of indicative parliamentary votes could be held if current talks fail.
Overall Sterling movement was generated by global trade issues and risk conditions, remaining resilient initially but after the New York open global trade fears sapped confidence triggering a sell-off. The Pound dropped below 1.2950 and the Euro pushed down to the 1.1520s. This morning, jobless and average earnings data releases will need a big variance from forecasts to make much impact leaving risk conditions to dominate sentiment.
Following President Trump’s tweets to Chinese President Xi Jinping, cautioning him and China not to retaliate with tariffs on American products, that’s exactly what happened. China slapped $60 billion worth of import taxes on American agricultural and manufactured products. President Trump’s administration is claiming there will be suffering on both sides of the dispute. Trump downplayed the impact on American consumers, yet his chief economic adviser, Larry Kudlow disagreed.
Boston Federal Reserve (Fed) President Rosengren stated that he was surprised that the US economy was not seeing much inflation at all. Minneapolis head Kashkari stated that the fundamentals of the real economy appear healthy while inflation should be left to build. Given trade fears, there was a shift in Fed Funds future contracts early in US trading with the chances of a 2019 rate cut increasing to around 70% from 60% late last week.
There was support yesterday for the single currency off the back of the trade war the US is waging with China with a potential closing of global carry trades funded through the Euro. There was a narrowing of yield spreads with the US meaning the Euro was underpinned. Many feel like the US economy will be damaged by this trade war, but there were also concerns in the Eurozone that the US would impose tariffs on EU car exports.
Today we see German CPI and wholesale price index numbers quickly followed by Spanish CPI data. Swiss producer and import prices are quickly followed by the UK’s unemployment rate and average earnings numbers. Later in the morning sees the German ZEW survey – economic sentiment and current situation with the same survey for the EU rounding off the data today.
Data to watch
08:30 GBP Average Earnings Including Bonus (3Mo/Yr) (Mar)
08:30 GBP ILO Unemployment Rate (3M) (Mar)
08:30 GBP Average Earnings Excluding Bonus (3Mo/Yr) (Mar)
08:30 GBP Claimant Count Change (Apr)
09:00 EUR ZEW Survey – Economic Sentiment (May) (Germany)
09:00 EUR ZEW Survey – Current Situation (Mar) (Germany)
09:00 EUR Industrial Production s.a. (MoM) (Mar)
09:00 EUR ZEW Survey – Economic Sentiment (May)