Good morning,
USD: Staying strong as Trump trade team heads to China
Dollar strength that has become the hallmark of recent market moves continued overnight last night as Asia picked up the optimism stemming from the US GDP report. While the overall report was just about as expected and featured only a 1.1% expansion of consumer spending, investors positioned themselves as optimists for upcoming data releases and subsequent revisions to this advance number.
Two of President Trump’s foremost trade representatives are on their way to China this week to attempt to gain an outline of an ongoing trade deal between the two countries. Robert Lighthizer, the US Trade Representative and Larry Kudlow, Trump’s top economic adviser, have different views of what a deal would look like and while a deal is not expected any time soon, measures will be looked at through the prism of any near-term help they could afford the Trump campaign and Republicans in this year’s mid-term elections this November.
US Personal Consumption Expenditure inflation is due this afternoon and represents the Fed’s preferred measure of what prices are doing in the US economy. A core price close to 2% should be enough to keep the dollar on the front foot.
GBP: Rudderless
Sterling came in for a bit of a beating on Friday following an awful GDP report. We were bearish before this announcement but this number caused a sharp intake of breath. 0.1% is the lowest quarter on quarter growth since Q4 2012 with particular weakness seen in construction and services sectors – together accounting for over 80% of the UK economy.
There are some caveats within this number of course; it is only the advance reading and therefore subject to revision and the poor weather that the UK suffered will have had a large effect on demand, particularly private consumption. That said, March’s numbers were horrific and are unlikely to be part of the sample yet so any revision to this advance number could easily be lower as opposed to higher.
At the beginning of last week the expected probability of a base rate hike at May’s Bank of England meeting was around 86%; it now sits at 24% and sterling is sliding as investors price in a delay to increases in the base rate until December.
The resignation of Home Secretary Amber Rudd is not a market event however feeds into market concerns on the Brexit balance within the Cabinet and votes on the Customs Union within the House of Commons. ‘The Brexit War Committee’ – the Cabinet plus some other members of the government – meet this Wednesday and with Rudd’s replacement expected to be in place by then, his or her stance on Brexit will be crucial.
The UK also has local elections this Thursday and the Conservative party are expected to take a bit of a kicking.
CNY/CNH: Stable yet unspectacular
Before the week’s news focuses on US/China trade, we have to look at the latest Chinese PMIs. Both official manufacturing and non-manufacturing beat expectations, however new orders and export expectations both fell which are negatives for the outlook. Overall the path for growth seems to be stable but unspectacular and recent cuts to bank lending limits are enough to suggest that the authorities have a close handle on things for now.
CNH and CNY reacted positively to Friday’s news from the Korean peninsula and has stayed strong overnight.
Have a great day.
Jeremy Cook, Chief Economist