Was going to start this week talking about trade risk and will certainly address this. However, the White House’s ability to outdo itself as the single largest risk factor facing markets can be summed up in one tweet from the President roughly an hour before the Non-Farm Payrolls (NFP).
‘Looking forward to seeing the employment numbers at 8:30 this morning.’
The NFP came in a 223,000 versus consensus of 188,000 – smashed it. “How did he know?”
Unemployment fell to an 18-year low of 3.8% and the annualised average hourly earnings jumped back to 2.7%. This data perfectly illustrates the Fed’s two mandates in one swoop – full employment, rising inflation.
We are 10 days away from the June FOMC meeting – consensus has a 25-basis point increase to the Federal Funds rate taking it to 2% – data like that seen on Friday night will all but lock that in.
The question is whether the data is so strong September becomes a real possibility of making 2018 a four-rate rise year rather than the forecasted three.
USD strength against the EUR looks solid in the interim.
Staying on the political risk to USD and putting the economics to one side; the decision to include Mexico and Canada along with the European Union in the next wave of tariffs on steel and aluminium exports shows that the White House is content to create conflict with allies and foes alike. It also shows that the US will happily disregard international trade laws and signed treaties under the guise of ‘national security’.
There is no greater example of the impacts these policies are having on global trade, growth and relations than the responses coming out of the G7 meeting over the weekend to the US. (And this while the current state of European political affairs (Italy and Spain) sees the EUR and the EU economy under extreme scrutiny something I discuss further in the attached video.) The US was almost systematically scolded by the other 6 nations for its current trade policies – the conclusion that could be drawn here is that the biggest winner in all of this is China as nations look elsewhere for ‘stable’ trade relations.
Washington’s relationship with the globe will ebb and flow but the policies and announcements of the past few months has given markets no other option but to price in risk discounts.
What the USD is having to come to terms with is if the discounts take into account the ‘Big 5’ inability to see eye to eye.
The Big 5: Peter Navarro, John Bolton, Robert Lighthizer, Wilbur Ross and Steve Mnuchin are the closest advisers to the President on ‘trade’. They clearly cannot agree on how to proceed with their current ‘strategy’ on trade: which nations to target targeting, policy frames and the even the desired outcome from said policies clearly differs between the five of them.
In fact, it could be argued that the President’s policy setting on global trade comes down to which one or ‘group’ of the five has the ear of the President at any given point in time. The current announcement could completely reverse in days or weeks.
In short – Risk and is likely to put a downside risk in the USD over the medium term