US MARKET WRAP 15 MAY 2019: Trump postpones European auto tariffs, helping risk assets
* SNAPSHOT: Equities up, Dollar flat, Treasuries up, Crude up.
* REAR VIEW: US President Trump postpones tariffs on European auto imports, USTR Lighthizer meets Canada Foreign Minister to move USMCA forward, Poor US Data, Poor China Data, CA CPI inline
* COMING UP: AU Employment Data, JN Corporate Goods, IT CPI, US Housing Data, Initial Jobless Claims, Philadelphia Fed Business Index, RBA’s Bullock, ECB’s Praet, de Guindos, Riksbank’s Floden
* TUESDAY’S EARNINGS: EU; Generali US; Applied Materials, Baidu, NVIDIA, Walmart
* TRADE: Ahead of the 18 May deadline, US President Trump decided to delay imposing EU tariffs on auto imports by up to 6-months. Some desks were anticipating the delay to these tariffs given that, with the EU already prepared to retaliate against any US tariffs, President Trump would be facing a trade war on two fronts, potentially presenting further economic headwinds heading into the 2020 elections. Moreover, there were reports that US President Trump, although still wanting to hold the threat of tariffs over the Europeans as leverage, is aware of fellow Republicans coming to the end of their tolerance for his protectionist policies. Switching fronts, USTR Lighthizer put forward a proposal today during meeting with Canada's Freeland, aiming to chart a path forward on the USMCA that would include a process for the removal of steel and aluminium tariffs. Freeland later commented talks had been productive but ratification of the USMCA would be difficult without the removal of US tariffs in Canadian steel imports. Elsewhere, the WSJ reported that US and Chinese negotiators were discussing dates for the US delegation to head to Beijing. While the meeting could be as early as next week, it will more likely shortly after that. The report was not clear on who would be attending the discussion which is set occur ahead of the G20 summit.
* OVERNIGHT, AUSSIE JOBS DATA WILL BE RELEASED: Overnight, Aussie Q1 wage prices were short of expectations (2.3% Y/Y for third straight quarter vs RBA SOMP which pencilled in 2.4%), and while it is only slightly off the RBA's forecast, it challenges the RBA's view that wage growth is seen gradually improving. Governor Lowe recently said 3% Y/Y is needed to generate inflation at 2.5% Y/Y (mid-point of RBA range). April jobs data overnight is the next piece to the puzzle, and will receive more focus than usual given that the RBA "will be paying close attention to developments in the labour market at its upcoming meetings" and thus the next few releases will be critical in determining the timing of potential policy easing. The employment change is seen at +15k (prev. 25.7k, range 5k-25k, 3M average 23.7k), the unemployment rate is expected to tick up to 5.1% from 5.0% (range 4.9%-5.1%) and the participation rate is set to remain at 65.7% (range 65.5%- 65.7%). Westpac’s Jobs Index now suggest that employment growth should slow to around annualised rate of 2% in Q3, which points to an employment rise of +10k. Westpac notes that if the participation rate was unchanged, it would imply +17.8k rise in the labour force, lifting the unemployment rate. Some analysts are more sceptical that the RBA will cut rates in the near-term: ANZ said "it will probably take more than this for the RBA to move, given the likely one-off impact of the election which will add thousands of (temporary) jobs," and it says a number jobs reports will be needed to establish a trend; thus, an August cut seems more likely than June or July, the bank said.
* FED: Fed VC Quarles, testifying to lawmakers on banking and supervision, stayed away from monpol, and said he sees strong competition in US banking sector. Fed's Barkin (non-voter) argued that it made sense for the Fed to be patient on rates, stating that there was no strong case to move rates either higher or lower. He also toed the line on inflation, saying it was likely that the weakness was transitory; on trade, Barkin said he was monitoring US-China trade developments, and its impact on business confidence, noting that if a settlement was reached, he wouldn't expect much of an impact on the economy, while the impact of any prolonged battle would likely be confined.
* BREXIT: The UK government is to hold another vote on its withdrawal agreement bill (WAB) in the week of 3rd June. If not passed, Downing Street says, the feeling is either the UK is set for a no-deal Brexit or Article 50 being revoked as the EU is unlikely to grant an extension beyond 31st October (a notion that an EU official later said lacked credibility). The WAB is set to be published before the Parliamentary Summer recess on 23rd May and with PM May having alienated the Brexiteer branch of her own party as a result of the cross-part discussions, gaining support from the opposition Labour party will be critical to avoid a rejection. The cross-party talks are said to have been so far unsuccessful, with a Labour party spokesperson saying on Wednesday that the party would vote against the Withdrawal Bill if it did not meet their conditions. In regard to what changes have been made to the Brexit bill, composed of the WAB and the Political Declaration (PD), there has been little recent insight, but UK Brexit Secretary Barclay said the UK is exploring how much the PD can be changed amidst UK Brexit Negotiator Olly Robbins’ trip to Brussels. Elsewhere, Brexit Secretary Barclay said there was an underappreciation that a no deal Brexit could happen, adding that there is no automatic right of extension and his own personal preference would be to prepare for a no deal.
* US INDUSTRIAL PRODUCTION: A fall of 0.5% M/M missed expectations. Pantheon Macroeconomics explains, however, that the data may have been driven by calendar quirks. "April was a relatively long month, with 22 working days, and the 15th - payday for people paid semi-monthly - fell after the payroll survey week, leading to under-reporting of activity in the sector," and says that "months with both of these calendar events almost always report much weaker manufacturing output than usual; today’s report is consistent with previous experience." Pantheon says May's output will likely rebound strongly: "The underlying trend is soft, in the wake of the drop in the ISM survey since last fall, but output is not collapsing and our fear of a clear manufacturing recession through the whole first half of the year might prove to be a bit too bearish." Risks are presented by the re-escalation of the trade war with China, but it remains of the view that the main drag on manufacturing has been the steep downturn in China's cycle, rather than the trade dispute, "so US manufacturing should benefit as China cycle turns up."
* US RETAIL SALES: Retail sales missed expectations, falling 0.2% M/M in April against the consensus view looking for a rise, and suggests GDP growth could slow in Q2. The decline came despite the rise in gasoline station sales, outweighed by the fall in vehicle sales. But even accounting for these volatile items, the control group was still flat due to weakness in electronics, apparenl and non-store retail sales. "Admittedly, following the upwardly-revised 1.1% surge in control group sales back in March, the 3m/3m annualised growth rate still rose to 3.2% last month, a five-month high," Capital Economics says, and as a result, "real consumption growth remains on course to rebound to around 3% annualised in the second quarter, from only 1.2% in the first." But CapEco warns that with net trade set to provide a much smaller boost, and inventories likely to be a sizable drag, it continues to think that GDP growth will slow in the second quarter, to between 1.5% and 2.0% annualised. "With last year's fiscal boost fading and the drag from higher borrowing costs still feeding through, we expect growth to slow further in the second half of this year," the consultancy writes.
* US BUSINESS INVENTORIES: Inventories printed 0.0% in March, in line with the consensus. "Businesses involuntarily accumulated inventories in recent months amid somewhat softer-than-expected sales, taking the inventories-to-sales ratio to a 27-month high 1.39 in February," Oxford Economics said. "In March, a solid 1.6% jump in sales pushed the inventories-to-sales measure down to 1.37." The consultancy says that the latest inventories data points to a modest downward effect on the initial 3.2% real GDP growth estimate in Q1. Its own tracker still stands at 3.2%, given other modest upgrades from recent trade, construction, and retail data, but it expects that businesses will manage with relatively leaner inventory levels in the coming months, following the largely involuntary inventory build early in 2019."
* CANADA CPI: Canadian CPI rose 0.4% M/M in April, in line with expectations, and the Y/Y rate accelerated to 2.0%, also in line with expectations. The average of the BOC measures fell to 1.90% from 1.97%. "With inflation neither too hot nor too cold, the BOC can focus on indicators of growth in judging what, if any, adjustments have to be made to interest rates," CIBC writes, "With strength in the labour market and a March rebound in exports suggesting a pick-up in growth in the second quarter, we don’t expect that the BOC will need to cut interest rates as markets have been pricing." But CIBC says that economic growth of only 1.5% this year and next, along with little inflationary pressures, does not necessitate tightening policy either.
* GEOPOLITICAL: Following yesterday’s attacks on Saudi Aramco pumping stations along the East-West pipeline (the rebel Houthi group claimed the attacks), and the US suggesting Iran is behind the previous attacks on Saudi vessels, tensions are undoubtedly heightened both within the Middle East, as well as between the US and the west. Comments out of Tehran suggest the country is prepared for "all scenarios," while there was also a dose of bellicose talk from the Iranian Revolutionary Guard. The US has also been increasing its presence in the region with Navy vessels and fighter jets, with reports from officials that the country is mulling sending a large amount of ground troops. The State Department said the US is not rushing into a conflict in the region, and US President Trump said there was no in-fighting within his administration regarding his strategy (which follows Tuesday's reports that Trump was not aware of some of the options the Pentagon was drawing up). Elsewhere, the UAE said it was committed to peace and de-escalation, but there are serious problems and one of them is Iran’s behaviour; it added that it was still carrying out its investigation on the Saudi oil tankers attacked in its waters.
* WTI (M9) FUTURES SETTLE USD 0.24 AT USD 62.02/BBL; BRENT (M9) FUTURES SETTLE USD 0.53 HIGHER AT USD 71.77/BBL. The crude complex was under pressure in the European session on Wednesday, hampered by poor risk appetite and Tuesday's bearish API inventory report; however, prices rebounded on more constructive risk sentiment throughout US trade, finishing the day in the green. The DoE report confirmed the surprise build in crude stocks reported by the API, albeit only a 5.4mln bbls build rather than the API’s 8.6mln. Gasoline stocks drew by 1.1mln bbls (exp. draw of 0.3mln), distillates built by 0.08mln bbls (exp. draw of 1.01mln); Cushing reported a build of 1.81mln bbls (exp. 0.82mln). US weekly production fell to 12.1mln BPD from 12.2mln. In an initial reaction, the market did sell off, but this was short-lived and overridden by bullish sentiment amidst reports President Trump was mulling delaying implementing EU tariffs on auto imports by up to six-months, as well as reports from US Treasury Secretary Mnuchin that the US was in "serious talks" with China to improve their trade relationship, and could be heading to Beijing within a week. Also supporting prices was overhanging tensions in the Middle East, with eyes on Iran following recent attacks on Saudi vessels as well as the US mulling bringing more forces to the region, casting concerns on the stability of supply in the region. Elsewhere, Russian Energy Minister Novak said OPEC+ will assess progress of the output curb pact at the meeting in Jeddah on May 19th, and echoing the OPEC SeCGen Barkindo on Tuesday, said it was too early to anticipate the future decision on the output cut deal.
S&P 500 0.6% at 2851, NASDAQ-10 1.4% at 7503, Dow Jones 0.5% at 25652, SECTORS: Consumer Discretionary 0.8%, Consumer Staples 0.8%, Energy 0.5%, Financials -0.5%, Health Care 0.3%, Industrials 0.1%, Information Technology 1%, Materials -0.2%, Telecommunication Services 2.1%, Utilities -0.1%
* STOCKS SPECIFICS: Agilent Technologies (A) sunk after the technology co. reported weak earnings and revised down its revenue forecast for FY19. Take Two (TTWO) and EA (EA) were particularly buoyant after news emerged that legislation to ban the controversial “loot boxes” in games is unlikely to be passed through this year. Pfizer (PFE) shares moved higher after the firm announced positive results from the Phase 3 stage of a study into Abrocitinib, which treats Atopic Dermatitis. Twitter (TWTR) were supported as the social media platform announced that it had launched a search tool aiming to prevent the spread of misinformation regarding vaccinations. Similarly, Facebook (FB) was also buoyed after the firm announced changes to its platform, saying it has taken steps to restrict those who misuse its livestreaming feature. Boeing (BA) reversed early losses, catching a bid as news emerged that the FAA expected Boeing to submit its 737 MAX software fix for approval within the next week or so. Salesforce (CRM) shares were under pressure after the software firm received a downgrade from OTR Global, which cited limited upside and customers who appear more cautious than usual. Applied Materials (AMAT) were lifted after an upgrade at Sasquehanna.
* US T-NOTES (M9) FUTURES SETTLE 11 TICKS HIGHER AT 124-21+. Trade sentiment was again the driving factor for Treasury price moves on Wednesday. In early trade, however, the T-Note was again taking its cue from EGB's, where the Bund/BTP spread widened as participants digested comments from the Italian Deputy PM Salvini, who stated that EU deficit rules can be breached if measures would support growth (Setting up another conflict with both his coalition partners, as well as the EU). But since US traders got to their desks, the T-Note essentially became more horizontal (continuing to rise until news broke that Trump had pushed-back the decision on imposing auto tariffs on imports of EU vehicles, ut then seeing modest negative ticks). At settlement, major curve spreads were a touch wider/unchanged.
* FX WRAP: EUR was initially under pressure early doors as the Bund-BTP spread widened on the back of further rhetoric from Italy Deputy PM Salvini regarding the need for greater expansionary fiscal policy. However, the single-currency caught a bid after reports that US President Trump is to delay tariffs on European auto imports by six-months, EURUSD popped back above 1.1200. Conversely, USD, which had been on the front foot (despite mixed data), reversed course to finish the day relatively flat. GBP was not able to benefit from the rally in its neighbour the EUR, with comments from Brexit Secretary Barclay talking up the possibility of a no deal exit doing little to help. JPY strengthened in the morning amid fragile risk sentiment, but reversed course as reports of a delay to US tariffs on EU auto imports gave equities a boost. EMFX rallied for another day, with the exception of BRL, after Brazil Economy Minister Guedes hinted on Tuesday that 2019 growth forecasts may be cut (which was quickly followed a slew of GDP growth forecast cuts from banks including the likes of Goldman Sachs). XAU, which was testing the 1300 handle, rebounded today but lost steam on the news that US tariffs on EU auto imports would be delayed, settling just shy of the psychological USD 1,300 mark.
15 May 2019 - 21:03- Research Sheet- Source: RANsquawk
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