Dollar Higher, Equities Lower as Trade Tensions Ratchet Up

  • Global equity markets continue to sell off today as trade tensions are still ratcheting up
  • China officials led by Vice Premier Liu will arrive in Washington today for trade talks
  • The US data highlights this week will be April PPI today and April CPI tomorrow; Powell, Bostic, and Evans speak
  • Norges Bank kept rates steady at 1.0%, as expected; Philippine central bank cut rates 25 bp to 4.5%, as expected
  • Brazil COPOM kept steady at 6.5% last night, as expected; Mexico April CPI is expected to rise 4.42% y/y
  • Chile and Peru central banks expected to keep rates on hold

The dollar is mostly firmer against the majors even as risk-off impulses continue. Nokkie and yen are outperforming, while Stockie and Aussie are underperforming. EM currencies are broadly weaker. THB and HUF are outperforming, while TRY and KRW are underperforming. MSCI Asia Pacific was down 1.4%, with the Nikkei falling 0.9%. MSCI EM is down 1.8% so far today, with the Shanghai Composite falling 1.5%. Euro Stoxx 600 is down 0.9% near midday, while US futures are pointing to a lower open. 10-year UST yields are down 4 bp at 2.45% ahead of the 30-year auction today, while the 3-month to 10-year spread has flattened 3 bp to 3 bp. Commodity prices are mostly lower, with Brent oil down 0.1%, copper down 0.6%, and gold up 0.3%.

Global equity markets continue to sell off today as trade tensions are still ratcheting up (see below). The VIX is the highest since January 9. MSCI EM is taking it on the chin, down over 6% from the April peak and giving up nearly half of this year’s gains. MSCI EM FX has fared even worse, giving up nearly three quarters of this year’s gains and on track to test the January low.

China officials led by Vice Premier Liu will arrive in Washington today for trade talks. Conditions will be decidedly frosty after China threatened to take countermeasures against the US tariffs. Then, Trump claimed last night that China “broke the deal” and added that “they’ll be paying.” Markets had been pricing in a deal in May or June, and so these developments suggest a major repricing is now under way.

The US data highlights this week will be April PPI today and April CPI tomorrow. Headline PPI is expected to pick up a tick to 2.3% y/y, while core is expected to pick up a tick to 2.5% y/y. Elsewhere, headline CPI is expected to pick up a couple ticks to 2.1% y/y, while core is expected to pick up a tick to 2.1% y/y.

There are some other US data releases today. March trade (-$50.3 bln expected) and final wholesale inventories data should help round out the Q1 GDP revisions. Weekly jobless claims will also be reported.

The Fed’s Powell, Bostic, and Evans speak today. Yesterday, Brainard said that she wants to hear more about yield curve targeting. In which case, she should speak to BOJ Governor Kuroda. Brainard suggested that once the Fed’s traditionally targeted short-term rate (Fed Funds) hits zero, then the Fed should start to target slightly longer-term rates and then move out the curve as needed.

We don’t want to read too much into yesterday’s $27 bln 10-year note auction. By all accounts, demand was weak. The bid-to-cover ratio was 2.17, the lowest since March 2009. Part of the low demand is likely because US yields have been pushed lower by renewed growth concerns and safe haven flows. Yet when all is said and done, US yields continue to stand head and shoulders above most of the world. For now, that should be enough to sustain demand for US Treasury debt. Today, the US sells $19 bln of 30-year bonds.

Norges Bank kept rates steady at 1.0%, as expected. It confirmed that it will “most likely” hike again in June, which was slightly more hawkish at the margin. At the March meeting, the language about a June hike was much less committal. Norges Bank still sees rates likely peaking at 1.75% by 2021, which implies two more hikes after June. NOK has firmed after the decision and is likely to continue outperforming within the majors near-term.

Brazil COPOM kept steady at 6.5% last night, as expected. It maintained a neutral bias, saying that risks to inflation are symmetric. We disagree. April IPCA inflation will be reported Friday and is expected to rise 5.0% y/y vs. 4.58% in March. If so, it would be the highest since January 2017 and nearing the top of the 2.75-5.75% target range. As such, inflation risks are anything but symmetric. Yet Markets do not expect a rate hike until early 2020. As price pressures continue to rise, we cannot rule out a hike in H2 2019.

Philippine central bank cut rates 25 bp to 4.5%, as expected. It added that it will consider cutting reserve requirements next week. April CPI rose 3.0% y/y vs. 3.1% expected and 3.3% in March. Inflation is the lowest since December 2017 and right at the 3% target. Weaker than expected Q1 GDP growth of 5.6% y/y reported earlier simply added to the case for lower rates.

Mexico April CPI is expected to rise 4.42% y/y vs. 4.0% in March. If so, inflation would be the highest since December and further above the 2-4% target range. Next policy meeting is May 16, no change is expected then. Indeed, any notions of easing this year appear unlikely. March IP will be reported Friday.

Chile central bank is expected to keep rates steady at 3.0%. April CPI was just reported at 2.0% y/y vs. 2.1% expected and so inflation remains at the bottom of the 2-4% target range. Consensus sees the next hike in Q4, but much will depend on the global backdrop then.

Peru central bank is expected to keep rates steady at 2.75%. CPI rose 2.6% y/y in April, above the 2% target but within the 1-3% target range. The bank has kept rates steady since its last 25 bp cut back in March 2018. Consensus sees a hike in Q2, but we believe it will remain on hold until the global economic backdrop becomes clearer.