The last-minute deal between the US/Mexico and Canada preserves NAFTA with a new name USMCA. The deal revises rules surrounding automobiles, the dairy sector and intellectual property, but does not resolve end the controversy surrounding US tariffs on steel and aluminium. Both CAD and MXN are stronger against the USD this morning.
The markets are trading with a pocketful of hope that trade negotiations and Trump tweets are noise, leaving markets to believe in global growth and stability. Economic data now matters to the path forward as the uncertainty of monetary policy rests on the central bankers’ response function to surprises, less tweets and elections.
Witness the move up in Korean rates as the PMI report rises and the labor component at 5 ½ year highs sets up speculation for BOK rate hike. The Japan Tankan drop in sentiment was offset by the rise in Capex leaving the BOJ time to do nothing, with focus on the longer-end buying games into tomorrow’s 10-year JGB sale.For Europe, the PMI reports aren’t weak enough to offset the ECB plans on QE end and so the EUR holds but rates are higher. On the other hand, politics remain front and center in Europe though their effect on FX and bonds seems more limited. 1) Italy. 2Y BTPs sold off moving from 1.05% to 1.11% on a report in La Republica suggesting that the EU Commission will reject Italy’s budget proposal in November has further fueled uncertainty over the budget. 2) UK. Tories continue to split over Brexit while UK PM May continues to push her negotiations. Her speech Oct 3 maybe a key market event.
Gilts open lower, GBP holds with better PMI.This leaves today to the US political mood and the US economic data with a balancing act in between. The mood for risk is high and so few expect much to derail the rush to new highs for equities in the US. There is a pesky risk barometer out there to consider – the rise of oil to $83 in Brent opens questions of whether this is a tax on global consumer demand. Throw in the weather shift and risks to NatGas prices in Europe thanks to US/EU sanctions on Russia and you have the makings for trouble in energy prices driving up inflation and leaving less room for growth. We have seen this story before and it doesn’t end well. The energy producers are usually winners when oil is higher – and this shows up in CAD, NOK and RUB particularly. But taking out the NAFTA noise it’s interesting to chart the RUB today and think through whether the oil gains are reaching a tipping point for trouble. Watching 66 for such a signal but expecting momentum on oil and risk to lead us to 61.50.
Question for the Day: Is Asia slowing? Short answer yes – but how much matters. The focus on US/China trade tariffs and their spill over into Asia won’t go away. The hope trade rests on the Canada deal overnight leading to more for Europe and Japan. The reality is that the China/US talks are sidelined and that neither side thinks they will lose if they wait it out. The biggest loser is the ASEAN Manufacturing area as they reflect the overall global trade relationship between the two. The headline ASEA Manufacturing September PMI fell to 50.5 from 51 – this puts 3Q PMI average at 50.6 down from 51.2 in 2Q. In September both output and new orders slowed with exports declining even further. The role of FX declines in helping offset economic woes and rebalance maybe something to focus on as the Philippines topped the rankings in September while Indonesia drops down to 4th place.
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