Global Macro: Likely a case of ‘once bitten, twice shy’ for business confidence – Although the truce between Presidents Trump and Xi at the weekend was widely anticipated in the days leading up to the meeting, markets have still found room to react positively, with equities rallying, bond yields and the dollar rising, and expectations for Fed rate cuts easing somewhat (see below).
While the agreement to hold off on further tariffs while negotiations on a US-China trade deal resume is a positive development, there was scant detail on how (if at all) the differences between the two sides have been bridged since the last time talks broke down in early May. More importantly, we continue to think much of the damage from the trade war has been done in terms of the sharp fall in global business confidence. Given the unexpected twists and turns in the trade war so far, we think businesses will be reluctant to assume a wholesale resolution to the dispute in their investment plans. As a result, we expect business confidence to remain cautious in developed markets, and for investment to be weak over the coming quarters. Indeed, this was confirmed today by the US ISM manufacturing PMI, where the forward-looking new orders index fell to the lowest since end-2015. In China and other emerging markets – where the direct effects of tariffs are more significant – the removal of the imminent threat of tariff increases could be more of a support (see below for more on China macro).
As a result, we continue to expect central banks to cushion the blow to confidence by easing monetary policy over the coming months, starting with the Fed, which we expect to cut rates by 25bp at the 30-31 July FOMC. Having said that, the truce reduces the chances of a 50bp cut, though that was already looking unlikely following St Louis Fed president Bullard’s comments last week. OIS forwards now price in 31bp of cuts for July, down from 33bp on Friday, and as much as 37bp this time last week (i.e. a 25bp cut is fully priced, with 50bp 62% priced). For the ECB, we continue to expect two 10bp rate cuts in September and Q1, and the relaunch of asset purchases to be announced before the end of the year. (Bill Diviney)
China Macro: Good news from Osaka, weak PMIs – The outcome of the Trump-Xi meeting in Osaka was more or less as expected, although the easing of Huawei sanctions by the US was a positive surprise. Chinese stock markets reacted positively, while the CNY recovered further versus USD (reaching the strongest level in three months). True, the meeting did not shed much light on whether the two sides would be able to reach some sort of a deal later on. Still, for the Chinese economy it does make quite a difference whether USD 250bn of exports to the US is levied by 25% (current reality) or more than double that amount (threat). So, despite all the damage done already through the trade conflict including through indirect effects, the agreed truce takes away some headwinds for the Chinese economy at least for now – with an imminent threat gone for the time being. That said, given the weakness of the latest incoming data (partly reflecting drags from the trade conflict) we will look for further confirmation before considering further changes to our forecasts. In the meantime, Caixin’s manufacturing PMI for June joined its NBS equivalent in June by falling back below the neutral 50 mark today – both indicators are now at 49.4. Manufacturing PMIs for Asian bellwethers such as South Korea and Taiwan also fell deeper into contraction territory, with export subindices particularly weak as the trade conflict has started to hit Asian supply chains (see for more background our Asia Watch published last week). (Arjen van Dijkhuizen)