Friday was a big day for the markets – a disappointing nonfarm payroll figure, and the end of Trump’s punative tariffs on Mexico before they even started. Stocks had a great day as expectations that the Fed would cut rates soon increased even further (the implied rate on the August to October Fed funds futures were down 6-7.5 bps) and the Mexico deal took away one of the major risks to the auto sector.In this “risk on” environment, the commodity currencies gained while the safe-haven CHF and JPY fell, along with the dollar itself.
The focus over the last week was a step-up in Trump’s trade wars – adding Mexico again on top of the ongoing confrontation with China -- and the promise by the Fed that if the trade issue starts to dampen growth, they will “act as appropriate” to rescue the US economy stock market.
Today's meeting of the European Central Bank will approach monetary policy in two scenarios: • First scenario: the Council will stick to its view that the economy will recover in the second half of the year. • Second: whether it will reduce the expectations for growth and inflation outlook to cause a reaction in the euro. • The EU Commission has recommended starting a disciplined process against Italy (Negative for Euro). Due to high public debt sector around 130%, according to the criteria, 60% are permitted.
Bad news is good news I guess – the ADP report came in far below expectations, showing the US added a mere 27k jobs in May, far below the 185k that the market had expected. The result was another leg down in Fed funds expectations: a much steeper fall than Tuesday in expected rates at the short end of the Fed funds curve, and also declines further out than Tuesday– whereas Tuesday only rate expectations for this year declined, on Wednesday expectations out to June 2021 declined.
WTI and Brent crude oil prices are trading lower by -0.2% at $52.85 and $61.40 per barrel respectively during the European trading session after the bearish API oil inventory report and the worries of global economic slowdown which might weigh on the oil demand growth.
Fed Chair Powell surprised the markets (and me, I must admit) by implying that the Fed could cut rates if the US trade war with China and now Mexico started to impact the economy. Before his opening remarks at a Fed conference, he made what was clearly a well-thought-out statement addressing market concerns.
The dollar plunged after St. Louis Fed President Bullard said the Fed might need to cut interest rates soon. This was the first time since they put rates on hold earlier this year. Fed official had specifically said a cut might be necessary “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at the 2% target and also to provide some insurance in case of a sharper-than-expected slowdown," Bullard said.
• Fed keeps a wait-and-see monetary stance, but the last downside risk developments (China /US trade, slow Retail Sales) will probably test the FOMC strategy. The probability to decrease interest rate (25bp) at the end of 2019 has increased above 80% compared to the 60% one month earlier.
WTI and Brent crude oil prices are trading lower by -0.7% at $53 and $61 per barrel respectively during the European Monday morning session as the risk aversion sentiment dominates the global markets on the rising worries for an extended global recession impacting the oil consumption demand after the new threats from US administration to impose a 5% tariff to all Mexican imports.
Market Recap A risk-off day with a difference: usually (about 60% of the time), the dollar tends to gain on risk-off, but Friday it was the big loser. Even the “risk on” currencies, such as AUD, gained vs USD.
On May 10th USA raised tariffs on $200 billion worth of Chinese exports to US and will shortly start a process aiming at rising tariffs from $200 to $300 billion on June 17th, 2019. In contrast, China will raise tariffs on $60 billion worth of US exports effective on June 1st, 2019.
The global trade theme continues to dominate the financial markets. In the major battle, that between China and the US, both sides are digging in their heels. This is starting to slow global growth. Yesterday’s announcement by Trump that he would impose tariffs on imports from Mexico will only exacerbate the situation by increasing uncertainty.