Markets
Yesterday, European stock markets joined the rally which started on WS on Wednesday after high rank US and Chinese officials indicated the start of a negotiating period after placing hawkish opening bets in the trade conflict. Main indices ended 2% to 3% higher. US stock markets extended gains, booking another +0.5% to +1%. Core bonds grinded gradually lower throughout the session on the improvement in risk sentiment. Both the US and German yield curves bear steepened. German yields increased by 1.1 bp (2-yr) to 3.1 bps (30-yr). US yields added 1.1 bp (2-yr) to 3.8 bps (30-yr). Traded volumes were lower than on the previous two days with some investors side-lined ahead of today’s payrolls and a speech by Fed-governor Powell. The dollar gained momentum with EUR/USD (1.2240), USD/JPY (107.29) and the trade weighted dollar (90.45) all testing first support/resistance levels.
US President Trump surprised markets overnight just when trade dust seemed to have settled. He ordered his administration to consider tariffs on an additional $100 bn in Chinese imports, initially causing a new collapse in US stock market futures (-2%), an uptick in the US Note future and minor losses for the dollar. While Beijing condemned the move, it remains in favour of turning to the negotiation table. Proposing to slap the US by a similar amount of measures, the strategy used earlier this week, would more than cover all US exports to China.
We aren’t convinced that the overnight move will trigger a new full-blown risk-off session. US equity futures partly recovered losses, main Asian indices trade mixed, the US Note future is topping off and the dollar reversed all minor losses. Focus turns to the US payrolls report and speeches by Fed chairman Powell and future NY Fed governor Williams who both speak on the economic outlook. Consensus expects net job growth of 185k in March. Employment indices in ISM’s, the ADP employment report and weekly jobless claims continue to point to a very healthy US labour market, suggesting that the payrolls should at least be able to match this level. The unemployment rate is expected to decline from 4.1% to 4% which would be the lowest level since the end of 2000. Consensus forecasts wage growth of 0.3% M/M and 2.7% Y/Y increase. The latter was key in previous months to determine the market reaction. Matching the outcome should be sufficient to exert more upward pressure on the dollar and on US yields even if the reaction might be muted with the Powell speech in mind. We think that the key element will be whether or not the Fed chairman flags possible risks to growth stemming from the trade conflict. US stock markets might struggle in both cases (via the normalization narrative or via the weaker growth narrative). We see limited downside for the dollar and US rates though, given their recent resilience to the trade theme and as Powell certainly won’t step away from this year’s current consensus view of 2 more rate hikes this year.
News Headlines
US President Trump threatened a major escalation in trade tensions with Beijing, saying he was considering imposing tariffs on an additional $100 bn in imports from China. China left the door open for talks though, even as state media said the US is “recklessly wielding the stick of protectionism.”
Atlanta Fed Bostic, voting FOMC member this year, sees a buoyant US economy lifting inflation to the central bank’s 2% target “sometime in the next quarter or two”, but said he doesn’t think this should prompt the central bank to choke off the expansion (2% is not a ceiling!). Bostic is in favour of two additional rate hikes this year. He suggested that the Fed should pause its tightening cycle once it reaches neutral and then see how the economy evolves.
Japanese eco data were mixed. Labor cash earnings rose at the fastest pace since 2016 in February (1.3% Y/Y) and beat 0.5% Y/Y consensus. However, inflation-adjusted real wages fell for a third straight month (-0.5% Y/Y), undercutting household buying power. February household spending data disappointed, rising only 0.1% Y/Y.
