European markets enjoyed a decent day yesterday helped by reports that the American ambassador to Germany reportedly told German car executives that the US would suspend threats of charges on autos if the bloc also removed equivalent charges on US cars
Certainly, the prospect of zero tariffs in both directions is a much better alternative to the prospect of a 20% tariff but the key question remains around deliverability. For a start any such action would have to be decided at EU level, a fact that was confirmed by German Chancellor Angela Merkel, and for a specific sector to be given such a carve out would run the risk of irking a lot of smaller EU countries who don’t have a car industry, reinforcing the perception that Germany and France operate under a different set of rules to the rest of the EU. Furthermore, under WTO rules there is also the likelihood that the EU and US would have to adopt similar tariffs for Japan, and South Korea other big car exporters.
The euro got a lift on reports that the European Central Bank was a little uneasy about why markets weren’t taking their guidance of a Q3 2019 rate rise seriously, instead pricing in a hike at the end of Q4. This seems a bit of a stretch that firstly the ECB would be concerned about the pricing of something that is still over a year away and secondly that markets might react on the basis that the ECB might raise the deposit rate from -0.4% to -0.3% in the space of a three-month period.
When rates are this low who really cares about the timings, particularly when a 0.1% move is likely to be more than offset by a move in US rates of up to 1% over the same period. It’s more likely that the euro rebounded on the back of a fairly positive German factory orders number for May.
The pound got an initial lift on speculation that we might get a rate rise as soon as next month after Bank of England governor was upbeat about the current state of the UK economy. The boost didn’t last long as concerns returned about the ability of the UK government to speak with one voice on what their next Brexit move might be ahead of this weekend’s Chequers meeting of cabinet ministers. The most likely outcome from this weekend’s Chequers meeting is some form of fudge, with the end result that businesses may well have to continue with some form of contingency planning into the autumn.
Last nights Fed minutes didn’t contain too much in the way of surprises, however there were some signs that some policymakers might have a limited appetite for letting the economy run too hot, which would suggest that currently there is little appetite to rein back on further rate rises this year. These concerns appeared to outweigh concerns about the effects that an escalation in trade tensions might have.
Today’s key events will focus on a couple of areas, firstly the initial implementation of $34bn worth of tariffs on a range of Chinese goods which will in turn prompt a Chinese counter response, with investors asking the inevitable question of whether this is just the start of a slow descent into escalation, between the two parties.
We’ll also get sight of the June US payrolls report, following from yesterday’s slightly weaker than expected ADP payrolls number of 177k, where a number of employers complained of having difficulty recruiting staff. While this may well be true there doesn’t appear to be much appetite amongst these employers to boost wages if recent wages numbers are any guide.
Against this backdrop we saw the May payrolls report come in at the headline rate of 223k, but the resilience of the numbers once again underscored the fact there still remains a significant degree of slack in the US labour market.
This was reinforced by the fact the unemployment rate fell again to another multi year low of 3.8%, and yet wages growth still found itself languishing at 2.7%. It was an improvement on the previous month’s 2.6%, but it still remains well below the 2.9% that we saw at the beginning of the year.
Expectations are for a slight improvement to 2.8%, however with US oil prices now at their highest levels since 2014, US consumers may well start to feel the pinch if wages don’t start to move towards 3% in the coming months. A weak wages number could also feed into a more cautious tone when it comes to the expectation that we may see 2 more US rate rises this year.
One other thing that may be worth noting, last month President Trump tweeted that he was “looking forward” to the jobs report, a highly irregular thing to do which knowing the President’s ego more or less told the markets that the number would be a good report. Will he do the same thing again or will officials keep the numbers from him. Investors will inevitably draw conclusions if he doesn’t tweet before the jobs numbers, however it could be that he may have learned his lesson.
EURUSD – the 1.1720 level continues to cap the upside and while it does so we remain at risk of a retest of the 1.1620 level. A move back below the 1.1600 area opens up a retest of the May lows at 1.1510/20. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.
GBPUSD – has found short term support around the 1.3200 area for now, after yesterday’s move up to the 1.3275 level. The risk remains for a move towards the 1.3340 level, with only a move below the 1.3170 level negating.
EURGBP – has found support at the 0.8800 area this week, with the risk we could head back towards the highs this week just below the 0.8900 area. While below the 0.8900 area the risk remains for a move back towards the 0.8780 area, with broader support at 0.8700.
USDJPY – this week’s failure above the 111.00 area keeps the US dollar range bound, with support back at the 109.70 area. A move through 111.20 targets 112.00. Support now comes in at the 109.70 and 109.20 area.
