It’s a very strange world indeed when the long anticipated confirmation of a 25% tariff on steel and 10% on aluminium prompts stock markets to close higher, but that is precisely what transpired last night when US President Trump finally signed the order, confirming what we knew was probably inevitable with the departure of Gary Cohn earlier this week.
There were a number of caveats, and this is probably where markets are taking their cues, with Mexico and Canada exempted so that progress could be made on NAFTA. Furthermore the tariffs will only come into effect in 15 days’ time which does allow time for further exemptions for countries who have a close security relationship with the US. This would suggest some scope for further dilution, which may explain why markets are reacting in the fairly calm manner that they are.
Rather than shock and awe the president appears to be playing a slightly longer game in the hope that we’ll get to an outcome that prevents a final denouement.
Asia markets garnered support today from the announcement that President Trump had agreed to meet North Korea’s Kim Jong-un for talks about its nuclear weapons. While it is easy to be cynical, one can’t help feeling these talks could well go the same way as previous attempts but nonetheless it will be interesting to see how this one plays out.
Also in Asia Chinese CPI unexpectedly jumped to 2.9% in February, from 1.5%, though this could well be skewed due to the timing of Chinese New Year, something we’ll get a better take on when next month’s numbers come out, while the Bank of Japan left monetary policy unchanged.
A lot was made of the ECB dialling back its stimulus pledge when it decided to keep monetary policy unchanged yesterday. The removal of the paragraph that pledged to expand its monthly bond purchases if needed saw the euro spike higher initially, but the change was never going to be as hawkish as the market reaction suggested it was.
Firstly, there was never that much of a prospect that QE would increase this year, and the removal of the paragraph merely reflected that reality. In addition the guidance on rates was left unchanged, while the pledge to reinvest bonds for an extended period means that the balance sheet, already huge and still expanding, isn’t going to reduce in size any time before the end of the decade, unlike the Federal Reserve’s which is continuing to shrink, albeit glacially.
With the ECB nudging its inflation forecast for 2019 slightly lower, as a result of recent CPI price weakness, the implication is that any move on rates remains months, if not more than a year away, by which time US rates are likely to be still edging higher, if market expectations are any guide.
These expectations of US rates are likely to come under future scrutiny later today with the latest US employment report for February, along with the latest wages data which surprised markets last month when January wages jumped sharply by 2.9% largely as a result of 18 US states hiking their minimum wage levels.
This week’s ADP report suggested that there might still be a significant amount of slack in the US labour market with a strong 235k print, following on from a January 244k print.
In recent months there hasn’t been a great correlation between these two reports but nonetheless they have still been averaging near to the 200k jobs a month level. The January payrolls saw 200k new jobs added and a similar number is expected in the February figures, with 205k jobs expected.
Ultimately it’s not the headline jobs number that is likely to be the primary market mover here, it’s the average hourly earnings data and markets will be looking to see if the jump to 2.9% in January is sustained in the February numbers, with 2.8% expected. This would probably be sufficient to keep the 4 rate rise expectation for 2018 on the table after the jump from 2.5% in December.
A sharp fall back towards that 2.5% would suggest that the rise in wages might be a one off, and would be a surprise given recent surveys from the latest ISM and Beige Book which suggested that wages pressure is rising.
The pound's resilience is also expected to be tested today with the release of the latest manufacturing and industrial production data for January. After a disappointing end to 2017 we saw the latest PMI’s show a pickup in activity in the January PMI’s which should be reflected in the ONS numbers today with the latest manufacturing production expected to show a rise of 2.8% year on year, up from 1.4% in December, while industrial production is expected to rise 1.5% month on month and 1.8% year on year.
Construction is likely to remain a weak spot given the problems seen at Carillion and across the sector with construction output expected to show a monthly decline of 0.5%.
The latest NIESR GDP estimate for the UK economy is expected to slow slightly from 0.5% to 0.4%.
EURUSD – tried to push higher but ran out of puff at 1.2446 before sliding back, with the risk we could head back towards the 1.2250 area in the short term with longer term support at the 1.2160 area.
GBPUSD – struggling to rally meaningfully at the moment with resistance at 1.3920 for now. The large resistance at 1.3980 remains a key level. On the downside we have support at last week’s lows near 1.3710, and below that at 1.3660.
EURGBP – failed above the 0.8950 level for the second day in a row yesterday touching as buying subsided we slipped back down again. This area remains a key resistance area, which while it holds could prompt a return to the 0.8870 level, with a break retargeting the 0.8810 area.
USDJPY – still finding support near the 105.20 area with a move back through the 106.30 area arguing for a move back to the 107.20 level. A move below 105.00 targets the 100.00 area. We need to move above the 108.30 area to stabilise.
FTSE100 is expected to open unchanged at 7,203
DAX is expected to open 10 points lower at 12,345
CAC40 is expected to open 4 points lower at 5,250
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