Futures Tumble Amid Tariff, Payrolls, Powell Chaos

When summarizing yesterday’s market action, which saw the market surge for the third consecutive day and culminated with Europe’s best day since June 2016, we said that it all boiled down to one question: “Trade war or no trade war?”

Until 6pm, the answer was the latter, however with one announcement Trump flipped everything on its head, and just as the president called for an additional $100 billion in Chinese tariffs, futures tumbled, with Dow futs plunging over 400 points as escalating trade war with China was back front and center.

China promptly responded, with the Chinese state-run tabloid Global Times said the new tariff threat reflects  arrogance on issues to China and that Trump’s administration is totally wrong about the nature of current US-China trade relations, while China’ official press agency Xinhua stated the US proposal of USD 100bln tariffs violates international trade regulations and that China keeps the door open regarding trade discussions with the US.

Meanwhile there is today’s main event: March payrolls, where consensus is pegged for a 185k print (following that bumper 313k print in February). Still, as DB notes, March has been a tricky month for employment forecasters as the median consensus estimate has overestimated the initial March nonfarm payrolls print in four of the last five years by an average of 62k. Interestingly, the consensus has underestimated nonfarm payrolls by an average of 66k over the past two months.

Fed Chair Powell will also be speaking at 1:30pm ET. Consensus expects Powell to reiterate the upbeat outlook he presented at the March 21 FOMC meeting. However, since Powell will not be speaking on behalf of the Committee, we will be looking to get a sense of his own take on the latest data. There is Q&A so that will be closely watched.

And so, with both payrolls and Powell looming big on today’s event calendar, the market is once again obsessed with the ongoing trade war between the US and China, and stoically waiting for China’s retaliation, which is 100% assured and which will be a tit-for-tat increase in the amount of US imports subject to tariffs rising to $150 billion or… all of them, as the US exports just under $150 in goods and services to China, suggesting China will have to do “something else” to fully match the US response, with choices including devaluing the Yuan, selling Treasurys, blocking US oil exports, and others.

Or perhaps this is just more negotiating bluster, and neither the US nor China will do anything. To be sure, this is the theory preferred by the market, and is also why once again global stocks and US futures have recouped much of the overnight losses.

The ECB’s Coeure also felt the need to chime in and claimed that the ECB’s studies show US tariffs would be significantly negative for the economy globally. He also said drop in equity prices and uncertainty over tariffs retaliation already show adverse impact on economy, which of course is great news for central banks as it means they don’t have to hike rates.

Still, despite the rebound from the lows, both Asian and European shares fell alongside the U.S. futures dump Trump’s latest threat to target Chinese imports. Predictably, Treasuries rose and commodities, especially China-heavy industrials, fell. Also helping risk sentiment is today’s payrolls report (which Trump hinted could be “fantastic”), and Powell’s speech at 1:30pm in which the question – of course – will be “three or four.”

Digging through the carnage – at least until some 17 year old hedge fund manager decides that if $50BN in tariffs was good for 1000 Dow Points higher, then $150BN should be enough for 3,000 – carmakers and miners were the biggest losers in Europe’s Stoxx 600 Index. Almost all European sectors are in the red with the exception of utilities. Material names are underperforming amid the weakness in base metals. In terms of individual stocks, DAX heavyweight Daimler (-5.7%) shares are seen lower following company going ex-dividend. On the flip side, UK-based
Shire (+1.6%) is again at the top of the FTSE 100 after continued speculation in UK press that the Co. could be subject to a takeover attempt by Japanese Takeda Pharmaceuticals.

While China was closed for the day, the offshore yuan slid, with the USDCNH rising 250pips amid rising concerns China may retaliate by devaluing the currency…

CNY puts looking real cheap right about now

— zerohedge (@zerohedge) April 5, 2018

… after Beijing said it would counter U.S. protectionism “to the end, and at any cost.”

And yet despite the new trade war – and tape – bomb, Asian equities traded indecisive. Pressure in ASX 200 (unch) was contained and later reversed amid commodity sector strength in Australia and JPY weakness. KOSPI (-0.3%) was lower with index heavyweight Samsung Electronics failing to benefit from better than expected prelim. Q1 operating profit, as it also missed on revenue while some cited participants selling on the news and booking profits after the prior day’s rally.

Meanwhile for those who are about to lose track of everything that is going on, here is a handy recap courtesy of Bloomberg:

• The war of words on trade is escalating, with China saying it would counter U.S. protectionism “to the end, and at any cost.” The statement from Beijing came after Trump ordered his administration to consider tariffs on an additional $100 billion in Chinese goods on Thursday, sending U.S. stock futures tumbling. Meanwhile, China has signaled what could be next on its own tariff target list after American farmers: the U.S. shale industry
• With investors around the world are getting tired of the tit-for-tat in trade, U.S. Fed Chair Jerome Powell is facing off with U.S. payrolls as the days’ biggest potential headline- maker. Payrolls-wise, an increase of 185,000 new jobs is forecast, with hourly earnings also expected to show a slight pick-up. Five hours later, Powell to due give speech on the economic outlook during a visit to Chicago
• European Central Bank Executive Board member Benoit Coeure said the trade spat risks increasing the burden on central banks — as well as hurting the poor — by dimming global growth prospects
• U.K. productivity, which has been puzzling economists since the crisis, may be showing signs of picking up. The Office for National Statistics said Friday that the gauge, as measured by output per hour, rose 0.7 percent in the fourth quarter, a second period of growth

In FX, the Japanese yen handed back earlier gains, while the dollar headed for a second weekly advance. Commodities were mostly subdued overnight in which WTI crude futures briefly slipped to below USD 63.00/bbl. Esewhere, gold prices whipsawed after early safe-haven flows propped up the precious metal, which was then later pared as the greenback recovered and Asia risk sentiment somewhat improved, while copper was lacklustre on the trade fears and with its largest consumer closed for holiday

Bulletin Headline Summary from Ransquawk

• European bourses broadly in the red as risk-aversion due to trade wars resurfaces
• DXY underpinned, but CAD defensive ahead of US and Canadian jobs data
• Looking ahead, highlights include the US NFP and Canadian labour report, BoE’s Carney, Fed’s Powell and Williams

Market Snapshot

• S&P 500 futures down 0.8% to 2,641.75
• MSCI Asia Pac down 0.08% to 171.60
• MSCI Asia Pac ex Japan up 0.09% to 561.33
• Nikkei down 0.4% to 21,567.52
• Topix down 0.3% to 1,719.30
• Hang Seng Index up 1.1% to 29,844.94
• Shanghai Composite down 0.2% to 3,131.11
• Sensex down 0.07% to 33,574.89
• Australia S&P/ASX 200 unchanged at 5,788.74
• Kospi down 0.3% to 2,429.58
• STOXX Europe 600 down 0.5% to 374.20
• German 10Y yield fell 1.4 bps to 0.51%
• Euro down 0.08% to $1.2230
• Brent Futures down 0.4% to $68.06/bbl
• Italian 10Y yield rose 5.1 bps to 1.539%
• Spanish 10Y yield rose 1.5 bps to 1.249%
• Brent Futures down 0.4% to $68.06/bbl
• Gold spot down 0.1% to $1,324.65
• U.S. Dollar Index up 0.05% to 90.50

Top Overnight News

• China vowed to defend its national interests against U.S. trade actions and protectionism, the official Xinhua News Agency said following Trump’s order to consider imposing additional tariffs on Chinese imports; The Asian nation called on the European Union to aid it in rejecting protectionism from the U.S. and upholding the international trade order
• China’s commerce ministry will hold a briefing at 1pm London time on Friday about trade relations
• German industrial production unexpectedly fell in February as construction slumped and output of investment goods dropped; factory output slid 1.6% m/m, the biggest monthly decline since August 2015, compared with estimates in a Bloomberg survey for a 0.2% gain
• Falls in equity prices in response to the U.S. announcement to impose a tariff on steel and aluminum, and prevailing uncertainty on the scope of any retaliatory measures, have already contributed to tighter financial conditions, ECB Executive Board member Benoit Coeure said in a speech. Adds in a later CNBC interview that the central bank can look through the market impact of the trade spat

Asian equity markets traded somewhat indecisive as the region pondered over US trade policies in which recent efforts by US officials to ease trade concerns which helped Wall St notch a 3rd consecutive gain, was thwarted after President Trump ordered to consider an additional USD 100bln of tariffs against China. This latest announcement was in response to China’s retaliation and dragged US stock index futures, while pressure in ASX 200 (unch) was contained and later reversed amid commodity sector strength in Australia and JPY weakness. KOSPI (-0.3%) was lower with index heavyweight Samsung Electronics failing to benefit from better than expected prelim. Q1 operating profit, as it also missed on revenue while some cited participants selling on the news and booking profits after the prior day’s rally. Elsewhere, mainland China remained shut and Hang Seng (+1.0%) bucked the trend to trade firmly higher as it played catch up to the gains during the holiday closure. Finally, 10yr JGBs were uneventful amid an indecisive risk tone in Japan and following a tepid Rinban announcement, with the BoJ in the market for just over JPY 600bln in up to 5yr JGBs.

Top Asian News

• ‘It’s Becoming Childish’: Investors React as Trump Ups the Ante
• Malaysia’s Opposition Candidate Envisions 6% GDP Growth, No GST
• A $60 Billion Manager Mulls Selling All U.S. Assets on Trade War
• China Vows to Fight Trump Tariffs ‘to the End’ as Tension Rises
• Philippine Foreign Reserves Fall to Lowest Since December 2014

European bourses opened on the backfoot (Eurostoxx 50 -0.8%) as cautious sentiment resurfaces amid the escalating trade tensions. This follows US President Trump’s instruction to US Trade Representatives to consider USD 100bln of additional tariffs on Chinese products. Almost all the sectors are in the red with the exception of utilities, supported by Suez (+1.8%), benefiting from an upgrade at Raymond James. Material names are underperforming amid the weakness in base metals. In terms of individual stocks, DAX heavyweight Daimler (-5.7%) shares are seen lower following company going ex-dividend. On the flip side, UK-based Shire (+1.6%) is again at the top of the FTSE 100 after continued speculation in UK press that the Co. could be subject to a takeover attempt by Japanese Takeda Pharmaceuticals. Finally, Dufry (+3.0%) surged higher after the Co. proposed a dividend and announced the launch of a share buyback programme.

Top European News

• German Feb. Ind. Production Falls 1.6% m/m; Est. +0.2% M/m
• CD Projekt, KGHM ‘Negative Surprise,’ GetBack: Eastern EU Stocks
• Swedish Krona Decisive for Inflation, Riksbank Rates: Nordea
• Wirecard Says Talk of Interest in Ingenico ‘Pure Speculation’
• Coeure Says U.S. Trade Tariffs Have Tightened Market Conditions

Currencies:

• DXY: Although the Greenback is somewhat mixed vs G10 peers overall, net gains vs high beta/riskier counterparts compared to losses vs safer-havens are sufficient to keep the index on an upward trajectory ahead the latest monthly US jobs data. Indeed, the DXY has probed above 90.500 again within a 90.600-300 range and remains on course to close the 1st week of April and Q2 on a firmer footing.
• NZD: The Kiwi has gone from recent hero to bottom of the G10 pile as repeated failures to rally through 0.7300 vs the Usd has resulted in a loss of momentum, while the Nzd has also unwound relative gains vs the AUD, as the cross rebounds towards 1.0600. Note, however, Aud/Usd continues to reject 0.7700 and above advances with macro supply seen at 0.7690.
• CAD: The Loonie has lost some of its NAFTA-related positivity within a 1.2790-45 band vs its US rival, with a more cautious tone evident in the run up to Canada’s employment update and perhaps a bit more spill-over in wake of Thursday’s wider than forecast trade deficit.
• JPY: Risk-off sentiment due to a ramp up in US-China trade hostilities only partially underpinning the Jpy, as the headline pair trades between 107.00-45 parameters amidst reports underlying bids from Tokyo fund managers and charts flagging the 107.00-30 area as pivotal on a closing basis.

In commodities, trade was mostly subdued overnight in which WTI crude futures briefly slipped to below USD 63.00/bbl as markets were spooked by President Trump’s announcement of a possible USD 100bln of additional tariffs on China. Elsewhere, gold prices whipsawed after early safe-haven flows propped up the precious metal, which was then later pared as the greenback recovered and Asia risk sentiment somewhat improved, while copper was lacklustre on the trade fears and with its largest consumer closed for holiday

Looking at the day ahead, the main release will of course be the March employment report in the US including nonfarm payrolls and average hourly earnings data. Two hours following this, Fed Chair Powell will speak on the Economic Outlook. Prior to this in Europe the only  data of note is February industrial production data in Germany and February trade data in France. Finally the ECB’s Coeure is due to speak at a conference.

US Event Calendar

• 8:30am: Change in Nonfarm Payrolls, est. 185,000, prior 313,000
  • Unemployment Rate, est. 4.0%, prior 4.1%
  • Average Hourly Earnings MoM, est. 0.28%, prior 0.1%; YoY, est. 2.7%, prior 2.6%
  • Average Weekly Hours All Employees, est. 34.5, prior 34.5
  • Labor Force Participation Rate, prior 63.0%
• 1:30pm: Fed Chairman Powell to Give Speech on Economic Outlook
• 3pm: Consumer Credit, est. $15.5b, prior $13.9b
• 4pm: Fed’s Williams Speaks on the Economic Outlook

DB’s Jim Reid concludes the overnight wrap

2 data months ago today we were still in the age of innocence where US equities went up all the time (having just completed a record 15 successive positive return months after seeing +5.7% in January alone) and volatility only stayed low, extremely low or absurdly low. However then we saw the outsized average hourly earnings print on the first Friday of February and everything changed. First the inverse VIX ETPs/ETFs blew up, the VIX increased to one of the highest levels on record and then we soon moved to evidence of weaker data, trade wars and the major tech sector woes. Quite rightly the market now goes into every employment report with all eyes on average hourly earnings. If we’re right, the probabilities are that this number will have more upside surprises over the coming months whatever today’s reading is.

Indeed our economists expect the unemployment rate to fall to 3.4% by year-end (4% expected today – from 4.1% last month and to the lowest since 2000) which if right over the coming months should result in more noticeable  wage pressures as the labour market tightens well below full employment. It’s obviously the average hourly earnings figure which will get all the focus with both the market consensus and our economists expecting a +0.3% mom print. However as DB’s Alan Ruskin points out nearly half the forecasts are for 0.2% and none for 0.4% so the median forecast is slightly misleading. Our colleagues note that should earnings come in as they expect, the year over year rate will rise by about 13bps to 2.74%, still about 3bps below January’s recent high of 2.77% – the release that caused all the early Feb vol.

For payrolls, consensus is pegged for a 185k print (following that bumper 313k print in February). Our US economists  forecast 200k however. They also note that March has been a tricky month for employment forecasters as the median consensus estimate has overestimated the initial March nonfarm payrolls print in four of the last five years by an average of 62k. Interestingly, the consensus has underestimated nonfarm payrolls by an average of 66k over the past two months.

Fed Chair Powell will also be speaking around two hours after Friday’s employment report. In general, our economists expect Powell to reiterate the upbeat outlook he presented at the March 21 FOMC meeting. However, since Powell will not be speaking on behalf of the Committee, we will be looking to get a sense of his own take on the latest data. There is Q&A so that will be closely watched.

Before that, equities consolidated further yesterday as trade tensions eased. However just as the market thought that we might move from the harsh rhetoric to the negotiation table, overnight President Trump has issued a statement noting “in light of China’s unfair retaliation, I’ve instructed the USTR to consider whether tariffs (on an additional $100bn of goods) would be appropriate under section 301…”. He also added that the US is “still prepared to have discussions in further support of our commitment to achieve….reciprocal trade….” On the other side, China has vowed to defend its interests “against new US actions”. Elsewhere on Amazon, when asked if he wanted to make policy changes related to the company, Trump said “we’re going to take a very serious look at that” without elaborating more.

This morning in Asia, markets are trading mixed with the Nikkei (+0.44%) and ASX 200 (+0.10%) up slightly while the Kospi is down -0.63%. The Hang Seng is up +1.26% after trading resumed while Chinese bourses are still shut for  holidays. Elsewhere, the futures on the S&P are down c1% on the back of the overnight tariff story while the YEN is broadly flat as we type. Before this yesterday the Stoxx 600 jumped the most since late June 2016 (+2.40%) in part playing catch up to the positive US lead on Wednesday, while the DAX (+2.90%) and FTSE (+2.35%) also rallied.

The S&P rose for the third consecutive day (+0.69%) to be almost back to flat on an YTD basis while the Dow (+0.99%) and Nasdaq (+0.49%) also advanced. The risk on tone seemed to be helped by more conciliatory rhetoric from the US with President Trump calling President Xi a “friend”, while his top economic adviser Mr Kudlow noted “I think we’re going to come to agreements” and that “at the end of the rainbow, there’s a pot of gold”. Elsewhere, White House trade adviser Navarro noted that Treasury Secretary Mnuchin will hold talks with Beijing on the US tariffs on Chinese imports soon and there’s room to make a deal. The VIX fell 5.6% to 18.94.

Now recapping other markets performance from yesterday. Government bonds weakened with core 10y bond yields 2-5bp higher with the rise led by Gilts despite a weaker than expected services PMI print. The yield on UST 10y was up 2.9bp ahead of today’s payrolls while Bunds rose back up to 0.52% (+2.4bp). In FX, the US dollar index gained 0.35% while the Euro and Sterling fell -0.31% and -0.54% respectively. Elsewhere, WTI oil edged up 0.27% while  Gold dipped -0.50%.

Moving onto Fed speak on inflation and rates. The Fed’s Bostic who is a voter this year noted “I think we have a little ways to go” before neutral rates and then once we get to neutral “we should take a pause and see how the economy responds”. On inflation, he sees the strong US economy lifting inflation to 2% “sometime in the next quarter or two” but he is “actually very comfortable going above the 2% by some amount, 2.2%, 2.3%, I don’t think that is a crisis of overheating”.

Then on the dot plots, he noted it does not lock the Fed into a policy path, rather “the value of the plots is to give a sense of the distribution of the responses” by FOMC members.

In credit, Michal in our team has published a report “IG Strategy Data Flash: No Let-Up in European Credit Outflows as US Flows Improve” which provides charts and commentary on the latest IG bond fund flows and puts them in the broader context of flows in other asset classes. You can download it here.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the February trade deficit was wider than expected and the highest in c9.5 years (-$57.6bln vs. -$56.8bln expected) as exports rose 6.6% yoy while imports were up 10.9% yoy off a larger base. The weekly initial jobless claims was above market and the highest in c3 months (242k vs. 225k expected) while continuing claims was below expectations (1,808k vs. 1,843k). Overall, the Atlanta Fed now estimate Q1 GDP growth of 2.3% saar (vs. 2.8% previous), in line with our US economists’ 2.2% estimate.

The Euro area’s February PPI edged up 0.1% mom (vs. 0% expected), leading to an annual growth of 1.6% yoy, while the February retail sales print was below expectations at 0.1% mom (vs. 0.5%). Elsewhere, Germany’s February factory orders rebounded less than expected at 0.3% mom (vs. 1.5% expected). The final reading of the Euro area’s services and composite PMI were revised -0.1pt lower to 54.9 and 55.2 respectively, with the latter still at a level that suggests annual GDP growth of about 2.5%. Across the region, Germany’s composite PMI was revised down by -0.3pt to 55.4 while France was revised up 0.1pt to 56.3.

For flash PMIs, Italy’s composite PMI was weaker than expected (53.5 vs. 54.9 expected). In the UK, the services PMI print was the lowest since July 2016 (51.7 vs. 54 expected), partly impacted by harsh weather in the month while the composite PMI was also below expectations at 52.5 (vs. 54).

Looking at the day ahead, the main release will of course be the March employment report in the US including nonfarm payrolls and average hourly earnings data. Two hours following this, Fed Chair Powell will speak on the Economic Outlook. Prior to this in Europe the only  data of note is February industrial production data in Germany and February trade data in France. Finally the ECB’s Coeure is due to speak at a conference.