Markets Morning - US wages give USD strength, now for the trade war

Market Analysis /
Greg McKenna / 10 Sep 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome

Greg

Market Summary (7.45 am Monday September 10)

The jobs report Friday as a little stronger than expected with non-arms rising 201,000 in August with the jobless rate steady at 3.9%. But it was the much stronger than expected average hourly earnings print of 0.4% for the month which saw the US dollar surge and rates rise. That monthly increase lifted the year on year rate to 2.9% - a post GFC high.

There was some interesting elements in the jobs data – like downward revisions to previous months and a different outcome in the Household survey – which do give some reason to ponder the outlook for jobs. But it’s the wages surge which will keep the Fed on track for two more rate hikes in 2018 and then another couple in H1 2019.

That seemed to be the message from Loretta Mester,  Robert Kaplan and Eric Rosengren, in the wake of the jobs data, anyway.

So we had the US dollar move pretty much everyone though was coming. The Euro, which had been strangely elevated in European trade at one point despite the dataflow from the region, fell from around 1.1640/50 prior to the jobs data by about 1 cent and is at 1.1550 this morning. Sterling’s also lost about a cent from the highs and is at 1.2931 this morning while USDJPY is back at 111.03.

On the commodity bloc the Aussie had it’s weakest close in about two and a half years and is at 71 cents this morning for its second big weekly fall in a row. The Kiwi is down at 0.6530 and under pressure while USDCAD is at 1.3164 with hopes of a resolution to NAFTA seemingly the only thing between it and 1.33. Comments from US Agriculture Secretary Perdue on Canadian milk are worth noting in that regard.

Naturally rates are a little higher as well with the 2 year Treasury up at 2.707% and the 10’s at 2.942% with the curve at 23.40 points. Folks still seem to think we’ll see a slowdown in the year or so ahead.

Stocks were lower Friday in the US. But that was less about what the jobs data suggests on the path of Fed rates and more about the chances of a trade war escalation. President Trump gave every impression he is coming for China with not only the next $200 billion of tariffs locked and loaded but another $267 billion behind that.

Chinese trade data, and a ballooning record surplus with the US over the weekend won’t have helped. Time to be a little more realistic about this trade war and a little less sanguine methinks traders.

To the price action then and the S&P finished down 0.22% at 2,871 and closing in on the recent uptrend as process roll over – 2,854 is trendline support on the physical. The Dow Jones finished off 0.3% at 25,916 while the Nasdaq finished off the lows but with a loss of 0.3% to close the week at 7,430 – below the uptrend from April.   

In Europe the DAX halted its slide with a rise of 0.04% to close at 11,959 – watch 11,700 folks. The CAC rose 0.16% while the FTSE dipped 0.56%. As an aside Brexit looks to be getting increasingly intractable folks. Here at home after a ixed day in Asia – but one where China’s markets climbed off the mat – the ASX was down but off its lows Friday to close at 6,143. SPI traders have knocked 23 points off prices though and September futures sit at 6,108 15 points or so above important support.  

On commodity markets gold is at $1195 this morning, copper fell back to close at $2.6035 in HGc1 terms, and oil lifted of the lows as protests in Basra seemed to reinforce the issue of supply disruptions. Brent was up 0.4% to $76.83 while WTI was largely unchanged at $67.75. Bitcoin was off substantially at one point over the weekend but is currently trading at $6,394 down just 0.4%.

Looking at the day ahead we are still waiting on President Trump’s next tranche of tariffs, while we get NZ manufacturing data, Japanese Q2 GDP (final), Chinese inflation and vehicle sales along with a speech - at 1.05 pm AEST - from Michele Bullock, RBA Assistant Governor (Financial System) on “ The Evolution of Household Sector Risks”. That might be worth a read folks given the outlook and falling house prices. Tonight it’s UK Q2 GDP, industrial production, and manufacturing data in an otherwise quiet evening of releases.

Macro Stuff that affects everyone and everything - either today or eventually

International

  • I retweeted this from Holger Zschaepitz this morning noting that “Possibly more important than the #NFP data Friday was the weekend's #China trade data 👇👇👇”
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And I say that because not only is President Trump apparently readying to pull the trigger on the next tranche of $200 billion of tariffs on Chinese imports but he’s already lining up to whack another $267 billion. Basically that’s all Chinese imports into the US. That’s the message he gave reporters travelling with him on Airforce One Friday. “The $200 billion we are talking about could take place very soon depending on what happens with them. To a certain extent it’s going to be up to China. And I hate to say this, but behind that is another $267 billion ready to go on short notice if I want. That totally changes the equation,” the President said. Changes the equation? Yes it might, certainly for markets which are far too sanguine about this and have been for some time.
  • That’s particularly the case when the President tells Apple to bring production back to the US. That’s the whol point folks, the whole point.
  • And on trade it’s worth noting that the President said the US and Japan have begun talks and that “If we don’t make a deal with Japan, Japan knows it’s a big problem”. He also said “India called us the other day. They said we’d like to start doing a trade deal. First time”.
  • NAFTA is in name only at the moment with the US and Canadian negotiators apparently stuck on diary. Doesn’t sound like a big sticking point though we know agriculture is often a sticking point in these types of negotiations. SO to that end it is worth noting that Reuters reports U.S. Agriculture Secretary Sonny Perdue said Sunday Canada had encourage overproduction in the sector which “allowed them to export milk solids on the world market and below prices that cut into our opportunity for our dairy people to have access to that world market”.
  • Just quickly on the data Friday. It was pretty solid in terms of the overall increase of 201,000. And even though there were some downward revisions to previous months the overall results continue to print well north of population replacement cost. That tells you the labour market is still tightening which is what we saw in the uptick in wages to a 2.9% annual rate of change. That’s the strongest rate since 2009 when wages were collapsing in the wake of the GFC.  
  • What’s important about this data is its impact on the Fed. So to this end it is worth noting that Cleveland Fed president Loretta Mester said Friday “the case for bringing up rates…is very compelling”. She’s not getting aggressive though noting that while she sees NFP as “very positive news and a piece of the evidence that suggests this gradual raising of interest rates is appropriate for the economy,” she doesn’t “see it as this big breakout of inflation”. Her colleague, Dallas Fed president Robert Kaplan reitereated rates are rising and said he doesn’t know when they’ll hit neutral. “it won’t be until middle spring to middle of next year before we are approaching a level that I think is in the range of neutral, and I will all along the way be revising my views for what is the outlook for the economy”. That’s important folks. In a Powel, data dependant Fed, the data has to print weak to dissuade the Fed from its current path. Friday’s wages reinforces September and increases the chance of another hike in Dec. Futures traders have the Dec move priced at 75%.
  • Brexit is becoming intractable. Boris was at it again over the weekend using silly epithets to describe Theresa May’s chequers plan. But while we can probably ignore the former Foreign Secretary we can’t ignore that EU negotiator Barnier says the deal is not on the table but then Sunday UK Interior Minister Sajid Javid said “the only deal that we’ve got on the table, that’s the Chequers deal…And so it is up to the EU to respond to that”. You can kind of see where Boris is coming from when you hear that. Intractable?  
  • It’s Monday, and that means it’s time to take stock of how the global data flow has been tracking relative to expectations. Of not is that the US is climbing back toward the zero level while Europe’s weakish data last week has seen it slip back into negative territory and the US-EU CESI score differential nudge – just – back into positive territory for the US. And despite the Aussie dollar’s fall the Australian CESI score is still a world beater right now.It’s not always – actually hardly ever – just economic fundamentals folks.

 

Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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