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Has the global trade war reached its apex?

Today’s news headlines:

  • ‘Bank of Japan reduced buying in bonds maturing in more than 25 years’. Yield on 40-year debt rises to highest level since November. (Bloomberg)
  • ‘NAFTA deal not yet in sight, Canada stands firm on auto tariffs’. Canada and the United States showed scant signs on Thursday of closing a deal to revamp North American Free Trade Agreement. (Reuters)
  • ‘ECB must discuss rate path beyond first hike: Praet’. From next year, the European Central Bank will need to communicate the expected path of interest rates beyond its initial hike to keep market prices consistent with a slow rise in inflation, the ECB Chief Economist said. (Reuters)
  • ‘Prospects looking good for Mueller interview of Trump, source says’. President Trump’s outside legal counsel is ‘pleased with the progress being made’ in talks with Special Counsel Robert Mueller about a potential interview of the president, according to a source. (Fox News)
  • ‘Japan uneasy over Trump pressure on auto as summit, trade talks loom’. (Reuters)
  • ‘Italy’s government allies seek higher deficit to spur growth'. (Reuters)

The main event of Thursday’s morning session was better than expected; an upswing in UK August Retail Sales chimed in well with the previous day’s upside surprise in inflation. Most analysts were expecting sales to slow in August after temporary factors such as unusually hot weather and extended clothing discounts buoyed food and clothing sales during the early summer. While food and clothing sales did fall in August, household goods purchases made up the slack with overall sales rising 3.3% on the year. GBP moved sharply higher as it became increasingly evident that the UK is in an ageing expansion, nine years since its Great Financial Crisis recovery.

The rest of the session was dominated by the US Dollar’s slide. The impetus for the move was unclear, but it was in line with a general risk-on tone across markets. Equities rallied on both sides of the pond. The S&P 500 reached a new all-time high, helping US Treasuries briefly touch the highest since mid-May. In the FX complex, risk assets found support while the Dollar index put in another day of losses. The DXY index is now down 3.15% since its August 15th high.

One possible explanation for these market moves was Thursday’s early morning headline that China plans a broad import tax cut as soon as October. While the initial reaction to the headline was muted, this could be a signal that we have reached the apex of global trade tensions.

The global trade war has increasingly become a US-China story, with other Trump targets coming to the negotiating table. China’s move is a signal that it is bowing to international pressure to lower tariffs and engage in fairer trade practices. Though it may seem laughable, one can not underestimate the importance of soya beans. China consumes 60% of globally traded soya beans, and there simply are not enough in the world outside of the US to meet China’s need. It imported USD12bn from the US last year, an estimate of its trade reliance on the US.

Better-than-expected jobs data and Philadelphia Fed Business Outlook managed to limit the Dollar’s downward slide in yesterday’s afternoon session, but market sentiment remained risk-on. The Philadelphia Fed survey rose to 22.9 in September, beating expectations of 18.0 and the previous reading of 11.9. An increase in unfilled orders and lengthened delivery times suggest demand continues to outstrip supply. Later, US Existing Home Sales continued to suggest moderation in the housing sector which is burdened by affordability issues, higher input costs and higher mortgage rates.

For the day ahead, Eurozone Services, Manufacturing and Services PMI will provide one of the earliest reads on how the economy performed in September. At the latest European Central Bank (ECB) meeting, President Mario Draghi explained that the recent weakening in Eurozone data is nothing more than the economy returning to its growth potential, after overexerting itself for the last few years. The indices have fallen steadily since late 2017. The market will be looking for signs of stabilisation to confirm Draghi’s optimistic view.

Eurozone Manufacturing Purchasing Managers’ Index (PMI) will be particularly in focus after a sharp decline in Eurozone Industrial Production and German Industrial Production and Manufacturing PMI in August, driven by a decline in export orders. This begs the question; how much of a risk is the US trade war for the Euro Area? UK Public Finance data will also be released on the morning session, though GBP is much more reactive to Brexit headlines these days.

Canada’s July Retail Sales and August CPI figures will be released in the afternoon. Followed by Markit’s Manufacturing, Services, and Composite PMI’s for the US. They are important because they are one of the first reads on how the US economy is performing in September. After a strong print in the Institute of Supply Management’s equivalent indices for the month of August, expectations are likely to be high.