Resiliency Demonstrated


  • Republican leaders have pressed the President to reconsider his proposed tariffs
  • The RBA left rates on hold and made only small changes to the accompanying statement
  • BOJ’s Kuroda reiterated his comments from last week to the Diet today
  • The US economic calendar features factory orders and the final durable goods orders report
  • Korea February CPI rose 1.4% y/y; Philippines February CPI rose 4.5% y/y; South Africa Q4 GDP grew 1.5% y/y

The dollar is mostly softer against the majors as global equity markets recover. Kiwi and Nokkie are outperforming, while Loonie and Swissie are underperforming. EM currencies are mostly firmer. ZAR and KRW are outperforming, while IDR and RUB are underperforming. MSCI Asia Pacific was up 1.3%, with the Nikkei rising 1.8%. MSCI EM is up 1.5% on the day, with the Shanghai Composite rising 1%. Euro Stoxx 600 is up 0.8% near midday, while futures are pointing to a higher open for US markets. The 10-year US yield is up 1 bp at 2.89%. Commodity prices are mostly higher, with oil up 0.2%, copper up 0.7%, and gold up 0.3%.

The resiliency of the status quo is again on display. After much chin wagging and finger pointing after the Italian elections and the modest decline in Italian assets, they have bounced back today. Italian bonds and stocks are participating in today’s advance. Italian equities were off 0.5% yesterday and are up a 1.1% near midday in Milan. Italy’s 10-year yield rose three basis points yesterday is off five today.

It is true that in these early hours after the election, in which the center parties lost handily, the new government is hard to envision. There does seem to be a lot of posturing. However, recall that in September, German SPD leader Schulz ruled out another grand coalition. This past weekend, the SPD approved it, though without Schulz. Renzi offered to resign as leader of the PD, but only apparently after a new government is formed and the PD is not part of it.

Last week’s indication that the US Administration was preparing to put a 25% tariff on steel imports and a 10% tariff on aluminum sent ripples through the capital markets. It is the beginning of a tit-for-tat trade war, we were told. Shades of Smoot-Hawley. The system of checks and balances continues to unfold.

Republican leaders have pressed the President to reconsider, as they successful did on his stance on guns and immigrants. Gary Cohn, head of the National Economic Council, has reportedly pulled together an industry summit to explain to the President why the tariffs will end up undermining the US economy and offset the beneficial impact of the tax cuts.

If persuasion is not sufficient, there is more Congress can do. Republican Senator Lee has proposed a bill, the Global Trade Accountability Act, which would claw back some of the power the legislative branch has surrendered to the executive branch. It subjects all trade action to Congressional approval. There is scope for additional legislative action. The President may want to extend Trade Promotion Authority, but Congress can block this in the coming weeks. Also, there is talk of attaching an amendment to a bill that needs to be passed, such as the spending bill, that would block the tariffs.

One of the challenges of finding a veto-proof way to combat the tariffs is that there are many Democrats that are sympathetic to them. However, this is not really new news. Typically, trade legislation is backed by most Republicans and a free-trade wing of the Democrat Party.

Another element of resilience is the global equity market. The threat of a trade war seemed end the recovery after the swoon early last month. Yet, the S&P 500 reversed higher before the weekend and extended those gains yesterday. A move above 2734 would re-target last week’s high near 2790. In the wake of Wall Street’s strong gains yesterday, the MSCI Asia Pacific Index rose 1.3% today, snapping the five-day slide. European shares are also advancing. The Dow Jones Stoxx 600 is up 0.8% today, led by materials, financials and telecom.

There are two economic developments to note. First, after reporting softer than expected retail sales and a larger than expected current account deficit, the Australian central bank left rates on hold and made only small changes to the accompanying statement. While it expects exports to improve, it is watching household consumption closely. There is little indication that the RBA will change policy any time soon. Meanwhile, the decline in net exports and capex in Q4 warns of downside risks to the Q4 17 GDP report that is due tomorrow.

The second development was the comments by BOJ Governor Kuroda before the Diet. Kuroda reiterated his comments from last week. Essentially, he is saying that in the fiscal year starting in April 2019, when the BOJ currently projects that inflation will reach its target, the BOJ may begin thinking about exiting its extraordinary policies. The exit is conditioned on reaching the inflation target, and the BOJ has frequently pushed further out the time when this condition will be met. The takeaway is that the BOJ is not on the verge of removing its support.

The US dollar is sporting a slightly heavier profile today. The Swiss franc and the beleaguered Canadian dollar are the exceptions. Year-to-date, the Canadian dollar is the worst performing major currency, having lost 3.1% against the US dollar. The Swedish krona is the second worst, losing 0.8%. Riksbank Governor Ingves explained his cautiousness to Parliament, even though the refi rate is at -0.50% and growth is robust (~3.3% in Q417). The euro did record new multiyear highs against the krona earlier today before profit-taking was seen. Most of the major currencies are little changed as the market awaits this week’s key development, including the ECB and BOJ meetings and US jobs data.

The US economic calendar features factory orders and the final durable goods orders report. The tax cuts, depreciation allowance, and the repatriation are projected by economists to boost investment in the US. The preliminary January durable goods orders did not show this. In fact, excluding defense and aircraft, durable goods orders fell. Revisions are possible today with the factory goods orders, but they are not likely to be substantial. New York Fed’s Dudley speaks early, while Brainard speaks late in the day (after the markets close) and Kaplan will speak early in the Asian session on Wednesday. Both Brainard and Kaplan (Governor and Dallas Fed President, respectively) are likely candidates against committing to four hikes this year.

Korea February CPI rose 1.4% y/y vs. 1.2% expected and 1.0% in January. Inflation is still well below the 2% target. We think the recent reappointment of BOK Governor Lee for a second term is a good move and should signal continuity and predictability. Next policy meeting is April 12 and no change is expected then.

Philippines February CPI rose 4.5% y/y vs. 4.2% expected and 4.0% in January. This is the highest since August 2014, and moves further above the 2-4% target range. We think this cements the need to start the tightening cycle. BSP next meets March 22, and we think it will hike 25 bp to 3.25%.

South Africa Q4 GDP grew 1.5% y/y vs. 1.3% expected and 0.8% in Q3. This is the strongest rate since Q1 2015, but the sluggish economy remains a problem. CPI rose only 4.4% y/y in January, the lowest since March 2015 and in the bottom half of the 3-6% target range. SARB next meets March 28 and a 25 bp cut to 6.5% is possible then.