Market movers today
A busy week already kicked off this morning with the important Chinese Caixin PMI manufacturing. It was surprisingly unchanged in May at 50.2, and with two decimals it even increased from 50.16 to 50.24 (see more below). Today we also get PMI manufacturing from the US, UK, Sweden and Norway as well as US ISM manufacturing.
Later this week, we have the Euro area inflation, GDP breakdown and the important ECB meeting (on Thursday). In the US, attention will be drawn to Powell’s speech on Wednesday at the ‘Fed listens’ events and the labour market report on Friday.
On top of the important data and central bank events this week, the markets have to digest the recent escalation from US president Trump against Mexico/China and the general risk-off sentiment.
Selected market news
Financial markets continued in risk-off mode overnight, where Asian equity markets and the US S&P futures declined further. US bond yields also continued lower and markets are now pricing about 50bp of rate cuts from the Fed by the end of the year. We have also changed our forecast and now look for a rate cut in July or September, see FOMC Comment – Dovish policy signal to pave the way for an insurance cut , 31 May 2019.
The US-China trade war continues to escalate as China took the first steps on Friday to retaliate against the US export ban on Huawei. China announced it would create an ‘unreliable entities list ‘ of foreign companies, organisations and individuals that it deems ‘unreliable’ in terms of harming Chinese companies. During the weekend, FedEx was put under investigation but it was not stated that the move was related to the new list. On Sunday, China issued a White Paper on the trade war blaming the US for the escalation and repeating that China did not want a trade war but was also not afraid of fighting one. The next key event to look out for in the trade war is the meeting between US President Donald Trump and Chinese President Xi Jinping at the G20 meeting in late June.
As if the US-China trade war wasn’t enough, Trump is also launching tariffs on Mexico and he also withdrew India’s preferential trade status , leading to tariff increases. Trump’s tariff actions have raised fears that he may also lift tariffs on European autos later this year.
The small rise in Caixin PMI manufacturing overnight was surprising, as the official PMI manufacturing on Friday dropped sharply from 50.1 to 49.4. The truth may be somewhere in the middle, but metal markets also point to a set-back in activity in May after the sudden escalation of the trade war on 5 May. We expect Chinese activity to be under continued pressure until the trade war is resolved or at least is not escalating further. Our baseline scenario is still that we get a trade deal in H2 when the pain on both sides gets too high. But uncertainty around the timing of a trade deal is clearly elevated.
