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April
06
2018

Futures Tumble Amid Tariff, Payrolls, Powell Chaos
Tyler Durden

When summarizing yesterday's market action, which saw the market surge for the third consecutive day and culminated with Europe's best day since June 2016, we said that it all boiled down to one question: "Trade war or no trade war?"

Until 6pm, the answer was the latter, however with one announcement Trump flipped everything on its head, and just as the president called for an additional $100 billion in Chinese tariffs, futures tumbled, with Dow futs plunging over 400 points as escalating trade war with China was back front and center.

China promptly responded, with the Chinese state-run tabloid Global Times said the new tariff threat reflects  arrogance on issues to China and that Trump’s administration is totally wrong about the nature of current US-China trade relations, while China’ official press agency Xinhua stated the US proposal of USD 100bln tariffs violates international trade regulations and that China keeps the door open regarding trade discussions with the US.

Meanwhile there is today's main event: March payrolls, where consensus is pegged for a 185k print (following that bumper 313k print in February). Still, as DB notes, March has been a tricky month for employment forecasters as the median consensus estimate has overestimated the initial March nonfarm payrolls print in four of the last five years by an average of 62k. Interestingly, the consensus has underestimated nonfarm payrolls by an average of 66k over the past two months.

Fed Chair Powell will also be speaking at 1:30pm ET. Consensus expects Powell to reiterate the upbeat outlook he presented at the March 21 FOMC meeting. However, since Powell will not be speaking on behalf of the Committee, we will be looking to get a sense of his own take on the latest data. There is Q&A so that will be closely watched.

And so, with both payrolls and Powell looming big on today's event calendar, the market is once again obsessed with the ongoing trade war between the US and China, and stoically waiting for China's retaliation, which is 100% assured and which will be a tit-for-tat increase in the amount of US imports subject to tariffs rising to $150 billion or... all of them, as the US exports just under $150 in goods and services to China, suggesting China will have to do "something else" to fully match the US response, with choices including devaluing the Yuan, selling Treasurys, blocking US oil exports, and others.

Or perhaps this is just more negotiating bluster, and neither the US nor China will do anything. To be sure, this is the theory preferred by the market, and is also why once again global stocks and US futures have recouped much of the overnight losses.

The ECB’s Coeure also felt the need to chime in and claimed that the ECB’s studies show US tariffs would be significantly negative for the economy globally. He also said drop in equity prices and uncertainty over tariffs retaliation already show adverse impact on economy, which of course is great news for central banks as it means they don't have to hike rates.

Still, despite the rebound from the lows, both Asian and European shares fell alongside the U.S. futures dump Trump’s latest threat to target Chinese imports. Predictably, Treasuries rose and commodities, especially China-heavy industrials, fell. Also helping risk sentiment is today's payrolls report (which Trump hinted could be "fantastic"), and Powell's speech at 1:30pm in which the question - of course - will be "three or four."

Digging through the carnage - at least until some 17 year old hedge fund manager decides that if $50BN in tariffs was good for 1000 Dow Points higher, then $150BN should be enough for 3,000 - carmakers and miners were the biggest losers in Europe's Stoxx 600 Index. Almost all European sectors are in the red with the exception of utilities. Material names are underperforming amid the weakness in base metals. In terms of individual stocks, DAX heavyweight Daimler (-5.7%) shares are seen lower following company going ex-dividend. On the flip side, UK-based
Shire (+1.6%) is again at the top of the FTSE 100 after continued speculation in UK press that the Co. could be subject to a takeover attempt by Japanese Takeda Pharmaceuticals.

While China was closed for the day, the offshore yuan slid, with the USDCNH rising 250pips amid rising concerns China may retaliate by devaluing the currency...

... after Beijing said it would counter U.S. protectionism “to the end, and at any cost.”

And yet despite the new trade war - and tape - bomb, Asian equities traded indecisive. Pressure in ASX 200 (unch) was contained and later reversed amid commodity sector strength in Australia and JPY weakness. KOSPI (-0.3%) was lower with index heavyweight Samsung Electronics failing to benefit from better than expected prelim. Q1 operating profit, as it also missed on revenue while some cited participants selling on the news and booking profits after the prior day’s rally.

Meanwhile for those who are about to lose track of everything that is going on, here is a handy recap courtesy of Bloomberg:

• The war of words on trade is escalating, with China saying it would counter U.S. protectionism "to the end, and at any cost." The statement from Beijing came after Trump ordered his administration to consider tariffs on an additional $100 billion in Chinese goods on Thursday, sending U.S. stock futures tumbling. Meanwhile, China has signaled what could be next on its own tariff target list after American farmers: the U.S. shale industry
  
  
• With investors around the world are getting tired of the tit-for-tat in trade, U.S. Fed Chair Jerome Powell is facing off with U.S. payrolls as the days’ biggest potential headline- maker. Payrolls-wise, an increase of 185,000 new jobs is forecast, with hourly earnings also expected to show a slight pick-up. Five hours later, Powell to due give speech on the economic outlook during a visit to Chicago
  
  
• European Central Bank Executive Board member Benoit Coeure said the trade spat risks increasing the burden on central banks -- as well as hurting the poor -- by dimming global growth prospects
  
  
• U.K. productivity, which has been puzzling economists since the crisis, may be showing signs of picking up. The Office for National Statistics said Friday that the gauge, as measured by output per hour, rose 0.7 percent in the fourth quarter, a second period of growth

In FX, the Japanese yen handed back earlier gains, while the dollar headed for a second weekly advance. Commodities were mostly subdued overnight in which WTI crude futures briefly slipped to below USD 63.00/bbl. Esewhere, gold prices whipsawed after early safe-haven flows propped up the precious metal, which was then later pared as the greenback recovered and Asia risk sentiment somewhat improved, while copper was lacklustre on the trade fears and with its largest consumer closed for holiday

DB's Jim Reid concludes the overnight wrap

2 data months ago today we were still in the age of innocence where US equities went up all the time (having just completed a record 15 successive positive return months after seeing +5.7% in January alone) and volatility only stayed low, extremely low or absurdly low. However then we saw the outsized average hourly earnings print on the first Friday of February and everything changed. First the inverse VIX ETPs/ETFs blew up, the VIX increased to one of the highest levels on record and then we soon moved to evidence of weaker data, trade wars and the major tech sector woes. Quite rightly the market now goes into every employment report with all eyes on average hourly earnings. If we’re right, the probabilities are that this number will have more upside surprises over the coming months whatever today’s reading is.

Indeed our economists expect the unemployment rate to fall to 3.4% by year-end (4% expected today - from 4.1% last month and to the lowest since 2000) which if right over the coming months should result in more noticeable  wage pressures as the labour market tightens well below full employment. It’s obviously the average hourly earnings figure which will get all the focus with both the market consensus and our economists expecting a +0.3% mom print. However as DB’s Alan Ruskin points out nearly half the forecasts are for 0.2% and none for 0.4% so the median forecast is slightly misleading. Our colleagues note that should earnings come in as they expect, the year over year rate will rise by about 13bps to 2.74%, still about 3bps below January’s recent high of 2.77% - the release that caused all the early Feb vol.

For payrolls, consensus is pegged for a 185k print (following that bumper 313k print in February). Our US economists  forecast 200k however. They also note that March has been a tricky month for employment forecasters as the median consensus estimate has overestimated the initial March nonfarm payrolls print in four of the last five years by an average of 62k. Interestingly, the consensus has underestimated nonfarm payrolls by an average of 66k over the past two months.

Fed Chair Powell will also be speaking around two hours after Friday’s employment report. In general, our economists expect Powell to reiterate the upbeat outlook he presented at the March 21 FOMC meeting. However, since Powell will not be speaking on behalf of the Committee, we will be looking to get a sense of his own take on the latest data. There is Q&A so that will be closely watched.

Before that, equities consolidated further yesterday as trade tensions eased. However just as the market thought that we might move from the harsh rhetoric to the negotiation table, overnight President Trump has issued a statement noting “in light of China’s unfair retaliation, I’ve instructed the USTR to consider whether tariffs (on an additional $100bn of goods) would be appropriate under section 301…”. He also added that the US is “still prepared to have discussions in further support of our commitment to achieve….reciprocal trade….” On the other side, China has vowed to defend its interests “against new US actions”. Elsewhere on Amazon, when asked if he wanted to make policy changes related to the company, Trump said “we’re going to take a very serious look at that” without elaborating more.

This morning in Asia, markets are trading mixed with the Nikkei (+0.44%) and ASX 200 (+0.10%) up slightly while the Kospi is down -0.63%. The Hang Seng is up +1.26% after trading resumed while Chinese bourses are still shut for  holidays. Elsewhere, the futures on the S&P are down c1% on the back of the overnight tariff story while the YEN is broadly flat as we type. Before this yesterday the Stoxx 600 jumped the most since late June 2016 (+2.40%) in part playing catch up to the positive US lead on Wednesday, while the DAX (+2.90%) and FTSE (+2.35%) also rallied.

The S&P rose for the third consecutive day (+0.69%) to be almost back to flat on an YTD basis while the Dow (+0.99%) and Nasdaq (+0.49%) also advanced. The risk on tone seemed to be helped by more conciliatory rhetoric from the US with President Trump calling President Xi a “friend”, while his top economic adviser Mr Kudlow noted “I think we’re going to come to agreements” and that “at the end of the rainbow, there’s a pot of gold”. Elsewhere, White House trade adviser Navarro noted that Treasury Secretary Mnuchin will hold talks with Beijing on the US tariffs on Chinese imports soon and there’s room to make a deal. The VIX fell 5.6% to 18.94.

Now recapping other markets performance from yesterday. Government bonds weakened with core 10y bond yields 2-5bp higher with the rise led by Gilts despite a weaker than expected services PMI print. The yield on UST 10y was up 2.9bp ahead of today’s payrolls while Bunds rose back up to 0.52% (+2.4bp). In FX, the US dollar index gained 0.35% while the Euro and Sterling fell -0.31% and -0.54% respectively. Elsewhere, WTI oil edged up 0.27% while  Gold dipped -0.50%.

Moving onto Fed speak on inflation and rates. The Fed’s Bostic who is a voter this year noted “I think we have a little ways to go” before neutral rates and then once we get to neutral “we should take a pause and see how the economy responds”. On inflation, he sees the strong US economy lifting inflation to 2% “sometime in the next quarter or two” but he is “actually very comfortable going above the 2% by some amount, 2.2%, 2.3%, I don’t think that is a crisis of overheating”.

Then on the dot plots, he noted it does not lock the Fed into a policy path, rather “the value of the plots is to give a sense of the distribution of the responses” by FOMC members.

In credit, Michal in our team has published a report “IG Strategy Data Flash: No Let-Up in European Credit Outflows as US Flows Improve” which provides charts and commentary on the latest IG bond fund flows and puts them in the broader context of flows in other asset classes. You can download it here.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the February trade deficit was wider than expected and the highest in c9.5 years (-$57.6bln vs. -$56.8bln expected) as exports rose 6.6% yoy while imports were up 10.9% yoy off a larger base. The weekly initial jobless claims was above market and the highest in c3 months (242k vs. 225k expected) while continuing claims was below expectations (1,808k vs. 1,843k). Overall, the Atlanta Fed now estimate Q1 GDP growth of 2.3% saar (vs. 2.8% previous), in line with our US economists’ 2.2% estimate.

The Euro area’s February PPI edged up 0.1% mom (vs. 0% expected), leading to an annual growth of 1.6% yoy, while the February retail sales print was below expectations at 0.1% mom (vs. 0.5%). Elsewhere, Germany’s February factory orders rebounded less than expected at 0.3% mom (vs. 1.5% expected). The final reading of the Euro area’s services and composite PMI were revised -0.1pt lower to 54.9 and 55.2 respectively, with the latter still at a level that suggests annual GDP growth of about 2.5%. Across the region, Germany’s composite PMI was revised down by -0.3pt to 55.4 while France was revised up 0.1pt to 56.3.

For flash PMIs, Italy’s composite PMI was weaker than expected (53.5 vs. 54.9 expected). In the UK, the services PMI print was the lowest since July 2016 (51.7 vs. 54 expected), partly impacted by harsh weather in the month while the composite PMI was also below expectations at 52.5 (vs. 54).

Looking at the day ahead, the main release will of course be the March employment report in the US including nonfarm payrolls and average hourly earnings data. Two hours following this, Fed Chair Powell will speak on the Economic Outlook. Prior to this in Europe the only  data of note is February industrial production data in Germany and February trade data in France. Finally the ECB's Coeure is due to speak at a conference.

 

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