This is Japan’s first time hosting the G20 and no doubt PM Abe would like the world to focus on “promoting free trade and innovation, achieving both economic growth and reduction of disparities, and contributing to the development agenda.” But financial markets appear to be a lot more interested in the bilateral meetings that will take place on the side, especially between US President Trump and Chinese President Xi.
Risk appetite improved last week when President Trump tweeted that the pair would have “an extended meeting.” But the schedule from the White House allows only about 90 minutes for the meeting on Saturday, before Trump is due to meet Turkey’s Erdogan. This raises the suspicion that the meeting will largely be a rubber stamp of a pre-agreed policy tweak.
It’s not clear how much has been agreed in advance though. Press reports suggest that “Xi plans to present Trump with a set of terms the U.S. should meet before Beijing is ready to settle a market-rattling trade confrontation”. This list includes removing the blacklisting of Huawei, lifting all new tariffs and dropping efforts to get China to buy even more US exports than was agreed at the December G20 in Buenos Aires.
While the US has not published a list of its demands, ending forced technology transfer, IP theft and state owned enterprise funding of foreign company acquisition would arguably top that list.
Thus it’s not obvious that an agreement is within easy reach in 90 minutes. However, with the US willing to suspend the threat of 25% tariffs on the $300bn or so of China goods imports that are not already subject to tariffs, there is a keen sense that both sides should be able to agree to further talks.
This is hardly the basis for a major improvement in the risk mood but is at least better than delivery of Trump’s 5 May declaration that the 25% tariffs would be imposed “shortly”.
The prospect of talks about talks has been enough to generate strong gains for global equity markets. The S&P 500 is up over 6% for the month of June and over 16% in the first half of 2019. This is the best first half performance for US equity market since 1997.
To be sure, Fed guidance of possible rate cuts has helped with Fed chair Powell suggesting that the FOMC “will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion”.
That is still not enough for Trump though who suggested that “We should have Draghi instead of our Fed person” on Fox Business this week, again noting that he has the “right to demote him” and the “the right to fire him”.
Financial markets are pricing in a full rate cut plus from the Fed in July and just under 3 cuts by the end of the year.
Speculation that we may even see a 50bps cut in July has weighed on the US$ this last week with a commonly watched index of the US$, the DXY index, hitting lows back to March.
Now despite Thursday next week being US Independence Day, it’s a full week in terms of data and events. We have important updates on US manufacturing, the ISM on Monday and the non-manufacturing ISM on Wednesday and then the non-farm payrolls report on Friday.
It’s a very busy week next week here in Australia too. On Tuesday the RBA reviews the 1.25% cash rate, having cut from 1.50% in June. Since then, Governor Lowe has said that it is “not unrealistic to expect” another cut.
Such language leaves us expecting a cut to 1% on Tuesday. Market pricing is around 70-75% so if the RBA does deliver, this should cap the A$ just above 0.70.
Over and above the RBA, we also have Parliament resuming where the focus will be on fiscal policy and the passage of PM Morrison’s tax package. We also have May building approvals and merchandise trade balance Wednesday and retail sales Thursday.
Event risk: Trump-Xi meeting at Japan G20 (Sat), China Jun official manufacturing PMI (Sun), Japan Q1 Tankan business survey, US Jun manufacturing ISM (Mon), RBA policy decision (Tue), Aust May trade balance & building approvals (Wed), Aust May retail sales, US Independence Day holiday (Thu), US Jun employment, Canada Jun employment (Fri)