Market movers today
Todays key market event will be the implementation of US tariffs on USD34bn worth of Chinese imports (with a further USD16bn set to be levied at a later stage). China has stressed that it would not ‘fire the first shot’, but retaliate immediately in kind once US tariffs take effect. For markets it will be interesting to see how US President Trump reacts to Chinese retaliatory measures and whether he goes ahead with his plan to add further tariffs on USD200bn of Chinese products.
In the US, the jobs report for June is due out: we estimate that payrolls rose around 190,000 and annual wage growth remained unchanged at 2.7% y/y. Even if wage growth surprises on the upside, we do not expect the Fed to accelerate its hiking cycle, as it has said it tolerates inflation exceeding the 2% target temporarily.
German industrial production will probably show a rebound in May, similar to factory orders released yesterday, see twitter .
In Scandinavia, industrial production data for May is the key release today in Norway and Denmark.
Selected market news
The trade war is now official after US tariffs on Chinese goods became effective this morning and China swiftly enacted its proposed levies on US goods in a much-expected retaliation move. Market focus is now on possible next steps. Notably, US President Trump overnight flagged the possibility of extending import taxes on as much as USD500bn worth of goods, which would amount to almost all US imports from China as of last year.
Separately, FOMC minutes from the June meeting published last night showed that the Fed is now increasingly alert to the adverse impact of the trade conflict. While the Fed remains confident in the gradual hiking path due to a ‘very strong’ US economy, worries over the downside risks from trade tensions coupled with emerging markets and euro-area vulnerabilities have intensified markedly recently. This is remarkable, as such concerns have been largely lacking from the Fed’s risk assessment so far in contrast to the ECB. Furthermore, the flattening US yield curve and the risk of it eventually inverting as a hint of a downturn ahead is also increasingly a FOMC concern and one that could make the Fed go slow on hikes. On the whole, US rates and USD were little changed on the minutes themselves though.
A decent ADP job report and a rise in the US non-manufacturing ISM to 59.1 in June (from 58.6) helped to lift the US mood yesterday and ensured US equities had a good run with S&P up close to 0.9%. Sentiment was more mixed in Asia where Chinese indices are lower this morning as the trade war became a reality while Japan is holding up decently. US Treasury yields ended the day slightly higher with notably the 2Y up close to 3bp; the 10Y point remains in the 2.84% area.
