Major Equity markets ended the week’s session weaker after The US employment report showed higher expected earnings and job growth with a surge in the average hourly earnings spiking 2.9% from a year ago. US Non farm Payroll came in at a healthy 201,000 higher than the expected 191,000 markets were expecting. US unemployment followed showing a slight increase to the unemployment que rising from 3.8% to 3.9%. The US Dollar traded higher across the board with the US Index jumping to 95.43. President Trump said Friday he was willing to slap additional tariffs on 267B worth of Chinese products entering the US at short notice, this is on top of the other 200B he is already considering. The current post NAFTA deal being negotiated between the Trump administration and Canadian officials is still on the go with differences in milk providing a barrier to an agreement being done. Currently US Milk products entering Canada are taxed at 270% in an attempt by Canada to protect their local industry. President Trump and Kudlow want the tariff removed to “give our farmers a break”. Trade discussions with Trump and Japan have also struggled to be reached with President Trump saying “if we don’t make a deal, Japan knows it’s a big problem”. Japan’s prime Minister Shinzo has tried hard to form a good relationship but so far his efforts haven’t helped derail any exemptions from the current metal tariffs bought in several months back. Locally the New Zealand Dollar continues to trade at fresh lows, down to 0.6515 against the greenback. This week we struggle to see any topside action with a good chance risk products could be sold off for safer style products and currencies such as the JPY if any trade discussions turn ugly. The NZ Trade Weighted Index (TWI) is down to 71.20 its lowest level since October 2016. This week’s economic docket sees the main prints being Australian Employment and Bank of England – Official Cash Rate Thursday along with US monthly CPI Friday.
The Australian Dollar has underperformed of late making it the weakest currency of the G10. Against the US Dollar it has hit a low of 0.7095, a 14 February 2016 level. Contributing to its overall weakness was the jump in USD against the Chinese Yuan as President Trump is preparing to add another 267B worth of tariffs to what looks to be the entire exports into the US. This comes in addition to the other 200B already scheduled. Clearly the further China succumbs to the US demands the weaker the Yuan will go and the weaker the Australian Dollar based on its trade ties with China and the manufacturing sector. The Australian Dollar got a double whammy of bad news late Friday also when the US Non Farm Payroll figure printed better than the expected 191k to 201k boosting the USD further. Late this week we have Australian Unemployment figures with the Unemployment rate expected to remain at 5.30% from August.
The New Zealand Dollar is being driven lower by offshore events and the stubbornness of investors to purchase risk products such as the kiwi. The NZD has been the weakest currency since Wednesday along with the Australian Dollar amid concerns President Trump could impose an additional 267B worth of tariffs on Chinese products. US Non Farm Payroll numbers printed better than markets expectations Friday coming in at 211k opposed to 191k dragging the New Zealand Dollar lower as the US Dollar was Bid. In a tax working group chaired by Sir Michael Cullen the National Party has been proved right that a Capital Gains Tax is not the best way forward to solving housing affordability. The report is not due out until February. This week the only economic release is Business NZ Manufacturing Index – A measure of business conditions with surveyed Manufacturers.
President Donald Trump is at it again with ongoing trade discussions now with Canada, Japan and China still unresolved. Some market commentators are suggesting the China leg of talks could span into years. A fresh batch of 267 Billion could be added at short notice to the other 200 Billion bucket of trade tariffs already planned and the 50B already facing 25% levies. This would bring the tally to basically ALL trade imports out of China into the US at just over 500 Billion. The US labour Department reported Non-Farm Payroll increased by 201,000 jobs in August 10,000 more than markets were predicting. Unemployment remains consistent coming in at the expected 3.9% with markets predicted to see this figure lower in October. Markets also focused on the increase in average hourly earnings which has spiked 2.9% from the same time last year, the biggest increase in wages growth since 2009. This will put pressure on Powell and the Federal Reserve panel to increase the cash price at the next cash rate announcement on September 27. This week’s monthly CPI figures and Retail Sales will be crucial and should represent the ongoing surging American economy.
The Euro received support from the Brexit headlines during the overnight sessions Monday after the chief EU negotiator gave hope that the first stage of Brexit could be finalised before November. The Euro traded higher on relief sentiment to up over 1.16 against the Dollar despite poor local data and weaker equity markets. The ECB will deliver its Cash Rate decision on Thursday with Draghi due to deliver his monetary policy press conference just after. With recent slide in inflation we would expect a more dovish tone from Draghi. He is not expected to waiver from recent June QE developments. In October they will reduce the monthly buying of Government Bonds from 30 Billion to 15 Billion, this will run until the end of the year with the ECB planning to not buy any further Bonds in 2019. This will bring the entre Bond buying QE program which started in 2015 to a close. A rate hike is due around mid to late 2019, at least this is what markets are expecting, should comments be made to the contrary this will put pressure on the Euro. I find this interesting given poor recent CPI and growth numbers not to mention the high unemployment rate.
We should see a lot of interest this week in the British Pound with a busy week of economic scheduled releases. Overnight EU’s chief Brexit negotiator Barnier said the possibility of reaching a deal by November was realistic – this sent the British Pound from 1.2950 to 1.3030 against the greenback and half a percent higher against the Euro. The main event will be the Bank of England (BoE) cash rate announcement. The BoE are not expected to raise rates from the 0.75% on August 2nd confident the vote will be a 0-9 in favour. The BoE signalled they were in no hurry to raise rates again in such a short time after pushing the rate above the financial crisis lows – a nine year shift, reiterating that Brexit uncertainties remain on the horizon. Manufacturing production monthly results were down at -0.2% from the expected 0.2% with manufacturers a little worried with the current slowdown, its lowest expansion rate since July 2016 post the Brexit referendum. The unemployment rate is announced tonight and is expected to remain at 4.0%.
The Japanese Yen rallied to 110.30 Friday after the President Trump eyed Japan as his next target in his global trade negotiations regime. US Non Farm Payroll figures published better than expected at 201,000 with annual earnings jumping 0.4% from 0.2% expectations putting the Yen was put on the back foot as Dollar buyers pushed the USD higher. With risk sentiment thickening the air the market awaits fresh market news as the Japanese Yen trades around 111.00 handle in what promises to be an action packed trade related week. Investors are bracing for trade related news as volumes seem a lower than normal. In Japanese related economic news the economy watchers index, a survey of workers who rate the level of current economic conditions gave the thumbs up on the state of the Japanese economy with statistics showing a rise in overall optimism with the indicator showing 48.7 after markets expected 47.2. Later in the week we have manufacturing data.
Canadian Unemployment data printed Friday slightly down on the expected 5.9% to 6.0% dragging the Canadian Dollar lower. US Unemployment data was also poorer than markets hoped for printing at 3.9%. It was the non Farm payroll which highlighted a booming US economy with 201,000 people entering the workforce up on the 191,000 markets were expecting. Also of note was a bumper wage growth report which has surged 2.9% y/y. Rate expectations will remain unchanged after the worse than expected employment data, pricing a small tightening or the Bank of Canada’s October rate meeting. A light week ahead is in store on the Canadian economic docket with only Housing statistics Friday. President Trump took a tough line with Canada overnight when he said – if the US doesn’t come to an agreement with Canada, it won’t harm the US economy. “It won’t be fine for Canada” the president said.
Major Announcements last week:
• Canada and US trade negotiations continue
• US Non Farm Payroll surprises at 201k with unemployment steady at 3.9%
• Canadian Cash Rate remains unchanged at 1.50%
• Australian quarterly GDP prints at 0.9% based on market expectations of 0.7%
• US Manufacturing data prints at 58.5 showing the market is expanding at a faster pace.
• UK monthly GDP prints at 0.3% from 0.2% expected
• Brexit headlines of a potential agreement in November push the Pound higher.