Good morning,

USD: Sunshine is here again

As expected the minutes from the Federal Reserve continued an overtly confident tone on the US economy. The dollar immediately took a walk higher as the central bank hammered home that it expects above-trend growth (supported by the Trump tax cuts), a strong job and wage market and strong investment spending into the US economy as well.

Alongside the positivity was the caveat that a “prolonged period” of an economy running at such a heightened state could lead to either a sustained and unwanted increase in inflation or, as happened in 2007/08, financial imbalances that could lead to a crash.

All of this points to a Federal Reserve that is happy to keep hiking interest rates to control inflation and another three 0.25% increases in the Fed Funds rate are priced in over the course of the next 12 months.

CNH: Trade war has begun

The trade war started this morning as US tariffs on Chinese goods were finally enacted. Yesterday US President Trump said that he intends to level tariffs on a further $16 bn worth of Chinese goods in a fortnight, and then has tariffs on another $400 bn worth of Chinese goods ‘in abeyance’ in case China responds. Were he to enact all of these tariffs then every single dollar of Chinese exports to the US would be subject to some form of tariff.

There was an inevitable, knee-jerk weakening of the CNH as the clock ticked through midnight Washington time and the tariffs went live, but that has since calmed down. Announcements of escalation are always going to shock markets as will data points that hint that US/China/World GDP has been affected negatively.

We expect an announcement of Chinese retaliation as soon as this afternoon.

GBP: Custom fit nightmare

The slow motion car crash of today’s Cabinet meeting on the UK’s customs arrangement with the European Union following Brexit is finally here and barrelling into a hedge at the bottom of the driveway. Overnight saw No.10 publish its 120 page customs proposal that includes a plan to keep Britain in concert with the EU on the regulation of goods and agriculture, keeping the Northern Irish border ‘frictionless’.

This is a clear rejection of some of the ‘red lines’ that Brexiteers had set down and Theresa May will have to stare down Messrs Johnson, Davis, Gove and others who prefer no agreement on customs.

We do not expect any news on this until well after we’ve left for the day. Ministers are apparently going to have their phones taken off them and locked away until the meeting ends so we could make the reasonable assumption that any rumours that emerge during the day are ‘fake news’.

Sterling rambled higher briefly as Governor Carney told a crowd in Newcastle that tighter monetary policy will be needed and that the Bank of England is increasingly convinced that the weakness in Q1 was ‘temporary’. Expectations of a hike in August are now as high as an 80% chance.

Sterling slipped following news that the German government viewed the customs plan that May is presenting to her Cabinet today as ‘unworkable’.

Have a great day and a better weekend.