Trade Talks Hit Another Snag

Risk appetite dampened by another turn in the trade war; sterling shrugs off sub-par inflation; a host of Fed speakers eyed today

Previous Day's Market Highlights

The trade war cycle continues. 

After a number of days in which sentiment has held firm, and expectations of a US-China agreement have grown, we appear to be back to square one. Again. 

Wednesday saw risk appetite take a modest hit after reports from the WSJ that Sino-US talks had hit a snag over farm purchases, with China said to have balked at the volume of purchases being discussed. This is a concerning sign, with talks over agriculture purchases the easy part of the deal, compared to more challenging areas such as intellectual property. The market, however, displayed a relatively modest reaction to the development; perhaps exemplifying the fatigue associated with the prolonged trade war. In terms of reaction, both the Japanese yen and Swiss franc were well-supported, adding 0.25% apiece, while Treasury yields also ticked lower at the longer end of the curve. Perhaps, with such high expectations, and limited reaction to the latest developments, eventual agreement (if there is one) of a phase one trade deal will be one of the greatest 'buy the rumour, sell the fact' trades ever.

Elsewhere, an apt summary of Wednesday's developments in financial markets would be, a lot of noise, but not a lot of volatility.

Among the noise, Fed Chair Powell's appearance on Capitol Hill - testifying before the Joint Economic Committee of Congress - was the highlight, despite Powell providing little in the way of new information. In fact, Powell's comments were almost a carbon copy of those made at October's FOMC meeting, namely that the current policy stance is 'appropriate' as long as the economy stays on track, and that the baseline outlook remains favourable, despite noteworthy risks remaining. The message solidifies the view that the Fed are now firmly on hold, assessing the impacts that this year's 75bps worth of cuts have had on the economy, and will only act in the event of a significant economic downturn. This fact is now fully reflected in market pricing, with no further easing priced this year, and just a 50% chance of any further rate cuts by the end of 2020.

The greenback was largely unmoved by Powell's comments, as well as shrugging off October's CPI inflation report. Data showed headline inflation ticking up to a 4-month high of 1.8% YoY last month, despite a fall in core inflation to a 3-month low of 2.3% YoY. However, with both measures hovering close to the Fed's 2% target, the data did nothing to materially alter the policy outlook or to influence the dollar.

Inflation data was also in focus from the UK, where headline CPI fell to a near 3-year low of 1.5% YoY last month. However, the fall should not raise significant alarm, with a recent reduction of Ofgem's energy price cap acting as a major drag on the index. The BoE had already incorporated such a fall into their forecasts, hence the release shouldn't materially alter policymakers' views. The pound ended the day unchanged against both the dollar and euro, having traded within a narrow 30 pip range against both over the course of the day.

Wednesday's only significant mover was the Kiwi dollar, which held onto overnight gains made after the RBNZ surprised markets by keeping interest rates on hold. The NZD closed more than 1% higher, the biggest 1-day gain since January.

Overnight, a couple of data releases missed expectations. The first estimate of Japanese third quarter GDP surprised to the downside, pointing to growth of just 0.1% QoQ. Meanwhile, in Australia, October's labour market figures were softer than expected. Unemployment ticked up to 5.3% last month, while the economy lost a net 19,000 jobs - evidencing that the RBA still has significant stimulative work to do.

Away from FX, trade concerns weighed on European equities, with the pan-continental Stoxx 600 closing 0.25% lower. In the US, however, equity markets rallied, as the benchmark S&P 500 gained 0.15%, hitting a fresh record high. Finally, oil prices were well-supported after comments from OPEC's Barkindo stating that US production in 2020 may be lower than expected. As a result, both Brent and WTI crude settled around 0.5% higher.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1665 1.1685 1.1525 1.37%
GBP/USD 1.2830 1.3012 1.2761 1.93%
EUR/USD 1.1000 1.1179 1.1000 1.60%
GBP/AUD 1.8880 1.8929 1.8546 2.02%
GBP/NZD 2.0075 2.0331 2.0002 1.62%
GBP/CAD 1.7010 1.7080 1.6724 2.08%

Today's Market Highlights

Today's data calendar is once again well-populated, however a host of central bank speakers - including the Fed's 3 'big-hitters' - will likely be of more interest than economic releases.

Starting with the FOMC, eight speakers are due today, with market participants looking for policymakers to repeat the 'wait and see' message that has been priced in since the October FOMC. Topping the bill will be the second day of Chair Powell's Congressional testimony, which should see remarks largely in the vein of yesterday's hearing. The other most notable speeches come from dovish Vice Chair Clarida, the brains behind the FOMC's policy actions, and dovish New York Fed President Williams (the NY Fed being in charge of open market operations). Meanwhile, throughout the day, comments from Board Member Quarles, voters Evans and Bullard, and non-voters Daly and Kaplan will be closely watched for any signs of division among committee members, particularly as market participants look towards the make up of 2020's policymaking committee.

The Fed are, however, not the only central bank with a busy calendar today. From the ECB, two of the major players - Vice President de Guindos and Chief Economist Lane - are set to make remarks this morning. Investors will be on alert for any signs that rates could be taken even deeper into negative territory, while continuing to listen out for a push towards fiscal stimulus from eurozone governments.

Turning to data, this week's UK economic health check is rounded out by this morning's retail sales release. Sales are set to have remained healthy in October, with both the headline and excluding fuel measures set to have increased by 0.2% MoM. In a similar manner to the US, consumer spending is one of the few factors propping up the UK's economic expansion, hence the gauge will be closely watched for any signs of softness, and indications that growth may slow in the coming quarters.

Speaking of growth, this morning also sees the second estimate of third quarter eurozone GDP - expected to remain unchanged from the previous estimate of 0.2% QoQ, and 1.1% YoY. Despite the accuracy of the measure increasing with each revision, the market impact tends to decline proportionally - barring any significant differences from the previous estimate.

Finally, across the pond, a couple of second-tier releases are due. October's PPI - producer price index - is set to show factory gate inflation remaining subdued, at just 0.9% YoY, potentially feeding through into subdued consumer prices in the coming months, though unlikely to exert significant influence on today's price action. This afternoon's other notable release will be last week's initial jobless claims data, expected to hover close to the 4-week average of 215,000.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.30am GBP Retail Sales (MoM - Oct) 0.2% 0.0%
9.30am GBP Retail Sales ex-Fuel (MoM - Oct) 0.2% 0.2%
10.00am EUR GDP (QoQ - Q3 2nd Est.) 0.2% 0.2%
10.00am EUR GDP (YoY - Q3 2nd Est.) 1.1% 1.1%
13.30pm USD Initial Jobless Claims (Nov 8) 215k 211k
13.30pm USD PPI (YoY - Oct) 0.9% 1.4%
15.00pm USD Fed Chair Powell Testimony (Day 2)