Tariff Man Strikes Again on the Eve of Jobs Day

President Trump’s surprise tariff announcement spooks markets, while the BoE leave policy unchanged ahead of today’s US labour market report.

Previous Day's Market Highlights

Markets went from one perplexing central bank decision to another on Thursday, with the Bank of England (BoE) following Wednesday's FOMC decision with a relatively puzzling policy message. The BoE's Monetary Policy Committee voted unanimously to keep rates unchanged at 0.75%, while also maintaining their tightening bias, reiterating that rates will increase at a 'gradual pace and to a limited extent'. However this tightening bias is now not only contingent on a smooth Brexit, but also on 'some recovery in global growth', a somewhat more cautious tone than exhibited previously; resulting in markets pricing a 55% chance of a rate cut by year-end. It was in fact Brexit which left market participants a little confused, with the BoE largely ignoring the risk of a no-deal exit, simply stating that the policy response in such a situation would not be automatic, bringing little clarity to the matter, despite the seemingly increasing chances of such an outcome. Meanwhile, the Bank's latest set of economic forecasts showed downward revisions to growth expectations over the next two years, while also projecting CPI inflation to remain below target until the end of 2020, setting out a less compelling case for any policy tightening. The pound largely ignored the BoE's policy decision, instead continuing to take more notice of ongoing political developments. Sterling ended the day unchanged against the euro, while dipping 0.1% against the dollar, recovering after earlier hitting a 31-month low, below the $1.21 handle.
Elsewhere, manufacturing PMI figures from across the globe showed activity in the sector remaining soft. The euro dipped after data showed activity contracting at the sharpest rate since December 2012, while activity in the UK's manufacturing sector remained at a 6-and-a-half year low. Across the pond, the picture was similarly bleak, with the US ISM index falling to an almost 3-year low at 51.2, barely in expansionary territory. The weaker than expected PMI reading halted the dollar's rally in  reaction to the Fed's hawkish cut. The dollar extended its losses, closing 0.15% lower, after an announcement from President Trump that 10% tariffs would be imposed on the remaining 300bln USD of Chinese imports, denting hopes that the two sides were close to reaching a deal. The tariff announcement somewhat spooked markets into risk-off mode, resulting in gains for the Japanese yen and Swiss franc, while also resulting in Treasury yields falling across the curve. Furthermore, the typically risk-sensitive Aussie dollar lost 0.6%, recording a record 10th consecutive loss against its US counterpart. Perhaps the surprise tariff announcement is the latest attempt from President Trump to manipulate the Fed.
Away from FX, European equity markets gained ground, the pan-continental Stoxx 600 adding 0.35% after a number of strong corporate results. In contrast, US indices were weighed down by increasing trade tensions, with the benchmark S&P 500 closing 1.1% lower. Crude oil also slid as trade concerns gripped markets. Global benchmark Brent shed 6%, while US WTI crude lost 7.9% - the steepest one-day fall since February 2015.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.0925 1.1246 1.0875 3.30%
GBP/USD 1.2110 1.2578 1.2079 3.97%
EUR/USD 1.1085 1.1285 1.1026 2.30%
GBP/AUD 1.7765 1.8041 1.7560 2.67%
GBP/NZD 1.8505 1.8960 1.8278 3.60%
GBP/CAD 1.6010 1.6438 1.5959 2.91%

Today's Market Highlights

As always, the first Friday of the month means only one thing for financial markets -- jobs day. The monthly US labour market report will be released this afternoon, recording the employment situation in July. Headline nonfarm payrolls are expected to moderate after a blockbuster June, with a consensus estimate for the US economy to have added 165,000 jobs last month, only slightly below the 3-month average of 171,000. The July ADP employment change figure, which is a semi-reliable indicator of the payrolls number, pointed to a jobs gain of 156,000, potentially increasing the chances of a downside surprise. The moderation in payrolls is due to ongoing supply constraints in the US labour market, rather than a decrease in labour demand, with a shrinking pool of available labour to fill open positions, which remain close to a record high. As always, in addition to July's jobs number, revisions to the previous two months' data will be closely watched.
Meanwhile, in addition to the headline payrolls figure, market participants will look for continued signs of labour market tightness in the unemployment rate and earnings data. Unemployment is set to hold close to a 49-year low at 3.7%, while average hourly earnings are set to increase at 3.2% YoY, 0.1% higher than in June. Earnings increases stem from the imbalance between labour supply and demand, with a shortage of labour supply resulting in increased competition to retain staff, leading to increased compensation. Continued signs of tightness in the labour market will likely cast further doubt on the market pricing of another 50bps worth of Fed rate cuts this year, posing an upside risk to the dollar. However, the US economy seems to be taking a back seat compared to concerns over the global economy in the Fed's thinking on monetary policy.
Elsewhere today, the economic calendar is relatively barren, with no other top-tier releases. From the UK, broader focus will remain on ongoing political developments, with July's construction PMI figures, set to show a 5th contraction in the last 6 months, likely to be ignored. Also due today are retail sales and producer price inflation from the eurozone, expected at 1.3% and 0.8% YoY respectively. Final consumer sentiment figures from the University of Michigan may also attract some attention, should any significant revisions be made from the preliminary estimate.
Looking ahead to next week, the data calendar is relatively quiet, with markets likely to begin their usual summer slumber. Highlights include monetary policy decisions from the RBA, expected to remain on hold, and the RBNZ, expected to announce a 25bps rate cut. In addition, 2nd quarter GDP figures from both Japan and the UK will be closely watched for any signs of weak economic momentum.
Lastly, this will be my final Morning Note for 2 weeks as I head off on annual leave. In my absence, we will be bringing you some brief highlights of developments in financial markets, before publication of this Note resumes as usual on 19th August. Thank you for reading my daily analysis, and for the comments and feedback over the first part of the year. I hope you enjoy the early part of August, I'll be back in a couple of weeks.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Construction PMI (Jul) 46.0 43.1
1:30pm USD Nonfarm Payrolls (Jul) 164k 224k
1:30pm USD Average Hourly Earnings (YoY - Jul) 3.2% 3.1%
1:30pm USD Unemployment Rate (Jul) 3.7% 3.7%
3:00pm USD Final University of Michigan Consumer Sentiment 98.5 98.4