NAB Morning Call

Pre-Trump Trade Battles and Currency Fears

Thursday 18th July 2024

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It doesn’t take Donald Trump to launch a trade war with China. The Biden administration has threatened further limits on microchip exports to China, which hit tech stocks heavily in the US. NAB’s Taylor Nugent says currencies, meanwhile, have reacted to comments from Donald Trump, who said he’s like to see a weaker US dollar, to compete against the weak Yen and Yuan. Today we look at the latest New Zealand and UK inflation numbers, and their influence on rate cuts, as well as looking ahead to today’s employment data for Australia. And the ECB, expected to be on hold, but there’s a press conference elater, if you want to stay up for it. If not, listen in to tomorrow’s podcast and get a decent night’s sleep in the meantime.

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Duration:: 17m
Broadcast on:: 17 Jul 2024
Audio Format:: mp3

Well, maybe not diagonally, but Donald Trump is starting to influence markets, okay. It was the Biden government that has hit the equity markets overnight with talks of restrictions on chip sales to China, and then we had Trump himself talking about how he doesn't want to see the US dollar getting too strong, implying that he's going to do something about it, if he does, assuming that he's president next year. Meanwhile, lots of numbers to contend with today. We've just had CPI for New Zealand in the UK, the ECB meets today, and we have Australia's employment numbers as well. What could that mean for the RBA? It's Thursday. It's the 18th of July, 2024. It's the morning call from Knapp. Good morning. Well, a half percent fall in the US dollar and a bad day for US stocks as well, particularly the NASDAQ down 2.8%, the S&P loss 1.4%, the Dow, though, is up 0.6%, but this time, the Russell 2000 is down over 1%, so we can't put it all down to rotation of stocks. Not quite as bad in Europe where the Dax fell 0.4%, but the FTSE 100 is up a quarter percent, but a 1.1% fall in the US stocks 50, bond yields allow it in the US and Canada down two basis points in each case for 10 years. No real moves in Europe except for the UK, where 10-year yields rose three basis points. Against that fall in the US dollar, the euro is up a third of 1%, the pound is up a quarter percent, but the Aussie is down 0.1% against that half percent fall in the US dollar. We're around 67 and a quarter US cents now, the yen incidentally climbed 1.3% in this session. An oil is a fair bit higher, up 2.7% for WTI and 1.6% for Brent, which is now over 85 a barrel, and I did get pulled up by a listener yesterday for not talking about gold, which hit a high yesterday. Well, actually, it did again today. Comics gold reached over 2,488 today, which is a record. It's down a quarter percent from that now, I guess we've got more investors convinced the rates are coming down, presumably, and perhaps worried that there's just too much money that's being borrowed by the government and how that's going to continue, and also perhaps fears about the dollar, the US dollar as well. Let's see Taylor Nugent from now in Melbourne is joining me today. Is that how you eat it? Why is gold doing so well, Taylor? It's a tough question to start with, Phil. I'm not a gold analyst, but yeah, as you say, it has been on a pretty good run recently. We have seen some reasonably strong central bank demand that I think has played into it a little bit over the last little while, and then all of those themes you mentioned there, some increasing confidence that the Fed can begin a cutting cycle, a bit of a pullback in yields, a bit of uncertainty out there, and then all of those usual themes about potentially getting some support amid uncertainty about fiscal sustainability and debt positions in the US. What could a potential Trump presidency mean for the dollar? I think all of those things probably could be. Wow. A week of dollar, by the sounds of it, Donald Trump's basically said that, hasn't he, over the last 24 hours, he wants to see a week against the yen and the one, so will he introduce policies to lower the dollar? He might not need to, because all he needs to do is say he's going to do that, and it will probably happen anyway. We've got a few months before he's president, but everyone's starting to pay attention to what he says now, aren't they? But let's look at shares very quickly. We've done that. We've satisfied that listener now. We've talked about gold, so let's talk about shares, because that is the big move today. Tech taking a big hit, and it's not just rotation, is it, because the Russell 2000 is well down, so this is more to do with government restrictions on exports to China, hitting the tech sector. Definitely led by the tech sector, the pullback in equities that we've seen today, and yeah, as you say, reports that the US is considering even stricter curbs on exports, and potentially curbs that would restrict exports from allied countries that are using US technology. Broadening from what we've seen recently, and when you look at where the declines in equity prices have been larger, so it is really driven by tech, and especially semiconductors is the semiconductor index is down over 6% in the US, and not just a US story either. You've got ASML in Europe also down quite a lot in Tokyo Electron quite weak as well, so it does seem to be it's that fear of broader and deeper export controls and the prospects for demand across semiconductors that is leading it. Then as you say, once again, bleeding into a broad attack, and the NASDAQ down around 2.5%, so sharply outpacing the 1% on so fall in the S&P 500, so those mega caps, and they give us in 7% and tech and semiconductors, especially the drivers of this move. That is with the Biden government, so imagine what would happen with the Trump government where you can expect even more in the ways of restrictions on trade, can't you? But let's look at the Fed, so we've had the beige book, we've had Christopher Waller. Let's look at those two things, first of all, you've perused the book, what was in it? Not too much changed in the beige book from what's been in previous releases and not much in the way of a market reaction. The messages there are pretty similar to what we've seen in the recent data flow and from the Fed's characterization. It's showing a bit of a regional divide happening, isn't it, I guess. That's the one take out from it. It's not an even recovery, I guess that's happening in the US, but what about Christopher Waller? Has he just been repeating what Jerome Powell's been saying? Yeah, so while on message, the title of his speech was getting closer to a cut. I'm interested in that similar to what we've been talking about with Powell. He's now seeing more upside risk to unemployment than he's seen for a long time. His characterization of the labor market is in a sweet spot and still seeing now the focus is on needing to maintain the labor market in that sweet spot. In terms of a cut, as I said, the key conclusion is getting closer. He laid out three scenarios, two more inflation prints like the last one, a cut in the not too distant future. Unevened data flow would make the timing a bit more uncertain but they could still be building that confidence and then the unlikely but pessimistic outcome would be a significant resurgence in inflation. But the key thing there, I think, is it's those first two scenarios that he sees as most important. So, again, consistent, but getting closer to that comfort to start the next. It took a lot of big dropping jobs, though, did he? Which is actually what Jerome Powell's been saying. If we see a big dropping drop somewhere, when we would have to act more quickly. But anyway, all right, well, there we are. We'll see what happens there. The good news is housing starts up 3% to 1.35 million stronger than expectations, manufacturing production in June as well, also higher than expected. So, could be a soft landing? Yeah. So, the June data, overall, I think, suggests that slightly stronger than expected into the second quarter. And I think that just plays to those same, some of that same discussion, the US economy growth has slowed, looks like GDP might come in slightly stronger than it did in the first quarter and in the second quarter. And some of these June indicators, we had retail sales early in the week, industrial production, housing starts, all a little bit stronger than expected in June. But I don't think there's anything in there to really emphatically say that this is some durable re-acceleration. But it does suggest that the data flow certainly isn't all one way. And on that industrial production point, probably worth noting that it was some of the strengths, especially the upside surprise, seem to be concentrated in automobile exports. So, potentially not quite as broad-based as that headline looks. But overall, the US data in June looks to be a bit better than expected and a little bit better than we saw through April and May. We had two big CPI reports, New Zealand and the UK, so New Zealand ever so slightly less than expected. So does that enhance the chance of an August cut? So, yeah, interesting. No clear signal either way is the takeaway from the New Zealand data. So the headline number down to 3.3% from 4%. That was a tenth below expectations. It was also lower than the RBNZ had penciled in back in their May projections. They had penciled in 3.6%. So good news, but contrasting that kind of non-traitables read that the RBNZ has been focused on for those indicators of how domestic pressures are translating through into inflation, that was a little bit stronger. So it did slow down to 5.4% from 5.8%, but slightly higher than the RBNZ's expectations there. We also saw services inflation holding it at 5.3%. So the headline numbers, good news, they're heading in the right direction, they'll increase the RBNZ's confidence that inflation will be back below 3% in the top of that 1-3% target range by the time we move into the third quarter. But the surprise, they're relative to their MayMPS, that was already a bit dated. We saw how much their communication changed in June. They talked about increasing confidence inflation would be within the target band in the second half of the year. So I think this data overall playing into that and the signs of stickiness on non-traitables. I think market's looking at that and suggesting that despite the headline beat, there's every chance there that that gives the RBNZ enough pause to not go in May. So all said and done expectations for an August cut. They were marginally above 50% looking at it now, they're marginally below 50%. So not much of a reaction and nothing conclusive there for August. Right. Okay. So the UK, 2% inflation was the headline, core is 3.5%, which is a bit more than expected. So does that make any meaningful difference for the Bank of England? Yeah. So for the Bank of England, I think what we saw there at the margin a bit worse than expected and that's been reflected in market pricing as well. So the headline rate, the core rate, both the 10th above the expectations, services prices, overall remains at 5.7%, so no big evidence of progress there. Maybe one silver lining through the detail is some of that strength in services inflation seem to be concentrated in accommodation and travel services, which does tend to be a little bit more volatile and potentially certainly in Australia, the RBA likes to strip out travel prices when it's thinking about that kind of services from a sticky inflation perspective to kind of get at those slower moving components. But overall, we saw market pricing pull back a little bit, so now around only 35% chance of a cut in August priced in. So that's pulled back 20% points or so. I think what it does do is the hawks on the BOE are not going to have enough comfort here to vote for a cut. So if they do deliver that cut in August, you can expect it as certainly a split vote and it to be a pretty close run thing, certainly labor market data today, evidence that labor is still calling, evidence of a slowing in wages growth is starting to flow through, might start to move the needle back in the other direction, but a little bit of bad news at the margin from the UK. We'll see what those employment numbers bring today and of course Australia's employment numbers today as well. At lunch time, the unemployment rate is expected to stick at 4%. What else can we expect? So yeah, certainly our expectation is for the unemployment rate to stay at 4%. Consensus is for it to tick higher to 4.1%. So where I think it's fair to say that's not reflective of huge disagreement analysts that somewhat split between 4 and 4.1, we wouldn't be hugely surprised by it. If it did tick higher, but push to make a decision one way or the other, we do think that it's staying at 4.0 is probably slightly more likely this month. I think big picture there, what we're saying, our SS in the labor market is it has cooled from the, it's lows, the unemployment rate has moved higher. We think it will continue to gradually move higher. Is that enough for it to tick a tenth a month? No, it's not. Could it be this month? Could it be next month? The trend on employment rate, we think, will be inching higher over time and we still expect employment to be growing. So we're penciled in 25k in the month, consensus there for 20k in the month. The importance of this number is probably the second most important data printer ahead of the RBA's August meeting, CPI on 31 July, far and away, the most impactful number. But I think it's worth remembering it's really the inflation data through the first half of this year that's most obviously going against the RBA's expectations. The labor markets, it's not proving more resilient than they thought growth is and it certainly isn't outperforming their expectations. So the RBA expected unemployment at 4% through this quarter looks like we'll be broadly in line with that. We expect 4.2% unemployment at the end of the year. So if we do get that tick higher today, the RBA could reason would be thinking that the risk probably skied a little bit higher on the unemployment rate than their recent projections. So that would be some offset to their concern about the strength of inflation. No, the ECB is certainly concerned about wages, aren't they? So they hold their meeting today, the press conference as well as around midnight, Australia time on hold is for clear message, isn't it? Very clear message. Yes, the strong expectation of markets, that's the expectations for analysts as well. It really does seem like the ECB is keeping their head down this meeting, they're coming back to reassess in September with those new projections and with a bit more data and the expectations are that they will be in a position to cut in September. But as you say, I'm expected on hold today and then how the guard frames that decision and how confident they are, they will be able to resume that tightening cycle come September, I think will be the focus, but not much expected from the ECB today. Bounds of trade numbers for Japan as well. So in May exports were up 13.5% a year, but imports were only up 9.5%. Those exports are expected to fall, though, aren't they? Even more so when Donald Trump starts to lower the value of the US dollar, perhaps. Unrelated to the Japanese trade data today, I think they'll be interesting. But yeah, on those Trump comments, it's worth noting that that did get a bit of, it looked like it did get a bit of a reaction in currency markets. So that the US dollar was lower down around half a per cent on the DXY and that was really led by the end. Trump pointed out, appointed to the yen and the remember specifically as currencies that he thought were unreasonably weak relative to the US dollar. And I think probably an interesting takeaway there is those comments. It's not obvious what the policy prescriptions are. The US dollar is a floating currency, but it does suggest that it's very much a focus. He talked about how it was one of the things that he worked hardest on during his first presidency was trying to prevent too much weakness in those Asian currencies. And so his focus on those kind of bilateral trade deficits and currencies does seem to be cranial. And so I think we did see a bit of reaction in currency markets to those comments. J.D. Vance, the new vice president, potentially, he's talking at the Republican Convention today as well. He's already spoken quite a bit outside the conference about it's time to get rid of the corrupt Biden Harris regime that has broken this country, he said. So we know where he's coming from. He's a Donald Trump in short pants, it seems, just a bit younger as well. And the push continues as well for Joe Biden to drop out of the presidential race. So Democrat Adam Schiff, who has been a longtime supporter, is now saying that the cost roads, he doesn't think they'll beat Trump unless they change their candidate. So it's all going on, isn't it? But he's sticking in there. In fact, the Democrat National Committee, it looks like they're trying to bring the nomination forward for Biden ahead of their convention next month by having the nominations happen online. That's causing a bit of controversy, trying to get it through before everyone changes their mind. It seems. So US politics very much at play. US jobless claims today, the Philadelphia Fed business outlook for July and earnings-wise. Well, we wait till tomorrow, it's tomorrow isn't after the close tomorrow that we get Netflix and Taiwan semiconductors, so we've got a day to wait about this time tomorrow, particularly in light of the way, tech stocks have been going today. But look, we'll leave it there for now. Good to talk to you later. Catch you next time. Thanks, Bill. And that is Thursday morning's morning call. From now, I'm Phil Dobby. I'm back again tomorrow. Thanks for listening in today. See you tomorrow. today. See you tomorrow.