Tariff Man Shatters the Calm after Upbeat Jobs Report

Markets are rattled after Trump threatens further tariffs on China despite an upbeat jobs report and hopes of a cross-party Brexit deal being agreed.

Previous Day's Market Highlights

Markets largely shrugged off Friday's US labour market report, despite a blockbuster nonfarm payrolls figure, with a lack of accelerating wage growth likely to keep the Fed on the sidelines for now. Nonfarm payrolls easily surpassed expectations, with the US economy adding 263,000 jobs in April, well above the expected 185,000, and the highest gain since January 2019. Revisions to previous months' data were also relatively upbeat, showing a net gain of 16,000 compared to previously reported data. Further robust data was to be found with the unemployment rate, which fell to 3.6%, the lowest since December 1969, though labour force participation unexpectedly fell. However, despite the blockbuster payrolls figure and low unemployment, wage increases have yet to follow, with average hourly earnings increasing at a below-forecast 3.2% on a year-on-year basis, the same level as in March. It was this data point that erased a significant degree of dollar optimism in the market, with a lack of wage increases likely to result in continued benign inflation thus making further interest rate increases unlikely. Further denting optimism towards the dollar were below forecast ISM non-manufacturing PMI figures, with the index falling to 55.5, the lowest level since August 2017, though still representing a solid rate of expansion. Over the course of the day, the dollar traded 0.3% lower against a basket of peers. 
Meanwhile, the pound recorded solid gains, taking advantage of a softer dollar along with reports of a possible compromise by the Prime Minister over a cross-party Brexit deal after both major parties received a drubbing in local elections. Sterling added a shade under 1% against the dollar, reaching its highest levels since 4th April. Against the euro, the pound made similar gains, adding 0.75% to reach the highest level since 27th March, though a Brexit deal remains distant. The euro also gained on Friday, adding 0.25%, after the single currency was underpinned by above-forecast inflation data, with headline CPI increasing at 1.7% on a year-on-year basis in April, the highest rate of price increases in 5-months, though much of the increase was due to higher energy prices. Core CPI, which strips out volatile food and energy prices, was also above forecast, increasing at 1.2% on a year-on-year basis, the highest level in 6-months. Despite the unexpected uptick in data, the release is unlikely to alter the ECB's policy stance, with many of the factors behind price increases likely temporary. 
In other markets, equities on both sides of the Atlantic gained on Friday, with the pan-European Stoxx 600 adding 0.4%. Across the pond, the US benchmark S&P 500 added almost 1%, the best daily gain since early-April, after a goldilocks jobs report, closing near to a record high. Finally, oil prices were broadly unchanged on Friday, though both Brent and WTI closed the week with losses of around 2% as markets largely ignored rising geopolitical tensions.

On Monday, despite a UK bank holiday, markets had little chance to relax after two tweets from President Trump broke the recent calm. The President threatened to increase tariffs on $325bln worth of Chinese goods to 25%, from their current 10%, on Friday, expressing frustration with the slow pace of trade negotiations and casting doubt on a deal being agreed in Washington D.C this week. Markets initially experienced a violent reaction, with Chinese equity markets experiencing their biggest daily drop in more than 3 years, though some concerns were allayed later in the day on reports a Chinese delegation would still attend negotiations this week as planned. US equity markets were also lower, though pared most of their losses throughout the day, the benchmark S&P 500 closed down by 0.45%. Elsewhere on Monday, most major currencies traded largely unchanged, though sterling did retreat, erasing around half of Friday's rally.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1705 1.1776 1.1512 2.24%
GBP/USD 1.3125 1.3176 1.2866 2.35%
EUR/USD 1.1215 1.1323 1.1110 1.88%
GBP/AUD 1.8660 1.8882 1.8093 4.18%
GBP/NZD 1.9835 1.9913 1.9242 3.37%
GBP/CAD 1.7620 1.7728 1.7300 2.41%

Today's Market Highlights

Overnight, the Reserve Bank of Australia (RBA) kept interest rates on hold, possibly due to RBA Governor Lowe being reluctant to alter monetary policy just 2 weeks from Federal Elections. The RBA did however flag concerns over 1st quarter inflation being noticeably lower than expected in addition to emphasising that the strength of the labour market will be key for further policy changes, placing greater emphasis on next month's labour market report. The Aussie dollar has gained in reaction to the policy decision, with the currency adding 0.65% to rise to the top of the G10 leaderboard. 
Turning to the day ahead, London traders return to a relatively empty economic calendar, with no economic releases due from the UK or eurozone. From the US, markets will be focusing on this afternoon's JOLTS job openings figure, with data expected to show 7.23mln open vacancies at the end of March, above February's 7.09mln. Such a figure is set to re-emphasise the labour supply issue in the US, with an abundance of open jobs and not enough people in the labour force to fill them, something that is expected to, but has yet to, accelerate wage growth. The only other notable data point will be Ivey PMI figures from Canada, expected to fall to 51.3, though this release typically has less impact than last week's figure from Markit. Central bank speakers will be of more interest, with the BoE's Cunliffe and Haldane, along with the Fed's Quarles, due to speak throughout the day. Particular focus is likely to be on the BoE speakers after last week's hawkish hold, with both having an outside chance of succeeding Governor Carney next year. 
Overnight, focus will once again fall on the antipodean central banks, this time with the Reserve Bank of New Zealand (RBNZ) set to announce their latest policy decision. OIS markets give a 49% chance of a 25bps rate cut, with talk of policy easing sparked by subdued inflation along with softer than expected employment data. Should rates be kept on hold, the RBNZ are likely to make a further dovish shift in their policy stance, laying the groundwork for a rate cut later in the year should data remain lacklustre, with a rate cut by September currently having an 80% probability. For the kiwi dollar, a rate cut would likely see moves to the downside, while keeping policy on hold may see moves to the upside as markets unwind short bets on the currency. 
Looking ahead to the remainder of the week, the economic calendar is relatively barren, with Friday set to be the busiest day. Markets will be focusing on the preliminary estimate of UK 1st quarter GDP for the impact of ongoing Brexit-related uncertainty along with the Canadian labour market report, with employment being one of the few bright spots of the Canadian economy. Focus will also fall on Friday's US CPI inflation release, expected to show prices increasing at around 2.1%, with the data taking on extra significance after Fed Chair Powell's comments about benign inflation being "transitory". Markets will also pay attention to any headlines surrounding US-China trade and Brexit throughout the week.

Today's Economic Calendar

Time Currency Release Consensus Previous
3:00pm USD JOLTS Job Openings (Mar) 7.24mln 7.09mln
3:00pm CAD Ivey PMI (Apr) 53.0 54.3
3:00am (Weds) NZD RBNZ Rate Decision 1.50% 1.75%
3:00am (Weds) NZD RBNZ Rate Statement