February 14, 2019

Daily Observations:

Asian stocks pared declines and US stock futures climbed after the US was said to be weighing postponing China tariffs for 60 days. The yen dipped ,the yuan advanced and share benchmarks came off their lows in Japan and Australia. Stocks slipped in Hong Kong and Korea. Mainland Chinese equities slipped after a rally on the Shanghai Composite Index from January lows hit 10%.

US Reported to Consider Extending China Tariff Deadline: 

President Donald Trump is considering pushing back the deadline for imposition of higher tariffs on Chinese imports by 60 days, as the world’s 2 biggest economies try to negotiate a solution to their trade dispute, according to people familiar with the matter.

The president said Tuesday that he was open to letting the March 1 deadline for more than doubling tariffs on $200 billion of Chinese goods slide, if the two countries are close to a deal that addresses deep structural changes to China’s economic policies, though he added he was not “inclined” to do so. The people said that Trump is weighing whether to add 60 days to the current deadline to give negotiations more time to continue.

US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are in Beijing for the latest round of high-level talks with Chinese Vice Premier Liu He on Thursday and Friday. Trump has indicated he will need to meet Chinese President Xi Jinping to agree on a final deal. While no date has been set, a White House aide this week said the US president still wants to meet his Chinese counterpart soon in a bid to end the trade war. Negotiations this week are focused on how to enforce the trade deal and putting on paper a framework agreement to present to the 2 presidents.

China Trade Exports Rebound:

Chinese export growth unexpectedly rebounded in the first month of 2019, while imports fell, with companies trying to ship goods ahead of the Lunar New Year shutdown likely boosting the result. Exports rose 9.1% in January from a year earlier to $217.6 billion, while imports fell 1.5%, leaving a trade surplus of $39.2 billion, the customs administration said Thursday. Economists had forecast both exports and imports would shrink.

US Exposure to Global Slump Increase, Goldman Says:

Goldman Sachs Group Inc.’s economists have indicated that while slowdowns abroad haven’t  caused a recession in the US in the past century, in an a time where global threats have become more important in an interconnected world, the danger posed by other countries is higher than before though it would still take a major pullback to potentially tip America into a downturn – roughly a 4 percentage point slowdown in global growth excluding the US.

“This is quite a high bar, though it is lower than it has been historically,” the authors write in a note Wednesday. That’s partly because exports make up a bigger chunk of the US outlook and the American economy’s potential to expand is lower, making it easier to dip below zero growth.

In addition, “the last few years have provided a reminder that the impact of changes in foreign growth on US financial conditions, especially US equity prices, can be quite variable and unpredictable.” The economists say the base-case probability of a recession over the next year of 14% would rise to 20% if global growth slowed 1 percentage point more than expected. The risk of recession would surge to 46% in the event of a 3-point deceleration. A 4-point moderation ups the odds to 64%.

Fed Officials Echo In Unison That Economy is Doing Well:

According to Bloomberg news, Fed officials are saying the same things regarding their positivity on the US economy. Cleveland’s Loretta Mester says it’s in a “very good spot,” while Philadelphia’s Patrick Harker says it “continues to do well.” Or it’s in a “pretty good place,” as Kansas City’s Esther George has it, faithfully echoing Chairman Jerome Powell’s “the economy is good.”

Their remarks, made Wednesday and late Tuesday, aim to reassure investors that it can be confident in the economy and the central bank’s commitment to keeping it on track. It’s a message that has helped calm anxious investors and short-circuit a potentially self-reinforcing Wall Street sell-off that gripped markets late last year.

Policy makers in January backed away from raising interest rates while they assess how headwinds from a cooling global economy and tighter financial conditions affect their otherwise constructive outlook for continuing solid US growth.

That pivot from a stance in December, where their forecasts showed 2 hikes in 2019, has eased expectations of further moves, and the accompanying risk that the Fed craters the economy by tightening monetary policy too much. Investors now see the central bank keeping rates on hold through 2019 with a possible cut next year, and officials are taking great care not to disturb that assessment, at least for now.

US growth was relatively strong in 2018; an estimated 2.9% according to economists surveyed by Bloomberg, but is expected to moderate this year as the global economy cools and as the stimulus from US tax cuts and government spending increases fade. Still, the labor market remains robust with unemployment of 4% near the lowest levels since the 1960s.

The central bank raised borrowing costs 4 times last year. Its policy rate, now between 2.25% to 2.50%, is close to the lower end of the range of policy makers’ estimates of neutral, the setting that neither slows nor spurs growth.

“If the economy performs along the lines that I’ve outlined as most likely, the fed funds rate may need to move a bit higher,” Mester said. “But if some of the downside risks to the forecast manifest themselves, and the economy turns out to be weaker than expected and jeopardizes our dual mandate goals, I will need to adjust my outlook and policy views.”

US Inflation Remains Contained:

A key measure of US inflation was little changed in January while the broader gauge slowed on lower energy costs, underscoring the Federal Reserve’s recent decision to be patient on raising interest rates.

Excluding food and energy, the so-called core consumer price index rose 0.2% from the prior month and 2.2% from a year earlier, Labor Department data showed Wednesday. The monthly pace matched the median estimate of economists. The broader CPI was unchanged from December, below forecasts, while the 1.6% annual gain was the smallest since June 2017.

The data suggest inflation remains around the Fed’s 2% target, with prices getting a lift from steady wage gains. Fed officials have signaled a pause on raising rates amid global growth risks and headwinds from trade. Even so, Treasury yields and the dollar rose after the report amid some hints that core inflation could be picking up. The latest data brought the three-month annualized increase to 2.65%, the fastest since March. If such acceleration is sustained, the Fed could have more reason to reconsider its rate pause.

According to Bloomberg’s economists, analysts should not be overly sanguine towards the soft headline print, which was largely attributable to sagging gasoline prices. Instead, they should be cognizant of a nascent acceleration bias in the core. Bloomberg Economics projects this bias will drive inflation higher over the course of 2019. Ultimately, this will put Fed hikes back on the table, possibly as early as the third quarter.

Goldman Reiterates Short Dollar Call:

Goldman Sachs Group Inc. is sticking to its guns in calling for the dollar to depreciate, despite criticism that its recommendation’s usefulness has come and gone.

Goldman advised shorting the dollar in early January, accounting for the Federal Reserve’s pivot away from steady gradual increases in the benchmark interest rate. While the greenback indeed dropped thereafter, it has rebounded this month as other central banks adopted less hawkish stances of their own. Goldman says the dollar will fall anew.

“One common pushback to this view is that, with the Fed shift now behind us, would it take another dovish surprise to push the dollar down from here?” Michael Cahill, a Goldman economist in London, wrote in a note Wednesday. “We think not.” The Fed’s “dovish shock” is still set to reverberate, because policy maker sensitivities have fundamentally shifted, in Goldman’s view. Chairman Jerome Powell and his colleagues will probably be increasingly responsive to negative news, and be more relaxed about any need to react to positive surprises with tighter policy, the thinking goes.

History shows the currency could still appreciate against this backdrop if the US suffers “pronounced recession concerns” or global growth as a whole falls to “worrying levels,” triggering a haven bid for the greenback, Cahill wrote. A second key scenario is if American growth “significantly outperforms,” making the Fed’s perceived shift short-lived, he wrote. “Ultimately, we think both of those scenarios are unlikely,” Cahill wrote. Goldman continues to recommend shorting the Dollar Index, targeting 93, with a stop-loss of 97.50.

FX Updates:

USD/SGD:

Spot: 1.3583

USDSGD gained earlier today to retest its 50-day moving average, currently at 1.3613, for the second time in a week, amid recent broader USD strength. Some consolidation is expected for the pair over the near term; 1.3500 should continue to provide support, while to the upside the 200-day moving average at 1.3642 is a likely resistance.

AUD/USD

Spot: 0.7109

AUDUSD gained from intraday lows earlier today following better-than-expected China trade export numbers reported Thursday, erasing its overnight decline in the process. A move back above the pair’s 50-day moving average is likely to lead to a climb back to the 0.7200 handle. The longer-term trend continues to point to the downside as indicated by the chart’s regression analysis trend. The key resistance continues to be the 200-day moving average.

USD/CAD:

Spot: 1.3251

USDCAD extended its previous day bounce off 1.3200, on the back of a stronger greenback as positive developments on the US-China trade talk front bolstered the USD. The 50-day moving average, currently at 1.3350 remains a short-term target for the pair. Expect USDCAD to test it again this soon. A break above it should pave the way for a move back to 1.3500 territory.

USD/CNH:

Spot: 6.7783

USDCNH continues its consolidation between the 6.7000 and 6.8260 levels, holding just above its 200-day moving average for the ninth straight session. The pair is expected to continue its sideways movement, with Chinese authorities keen to promote yuan stability as US-China trade talks get underway.

USD/JPY:

Spot: 111.06

USDJPY looks poised to gain for fourth straight day, with the pair currently threatening to break above its 111 handle, on the back of a firmer USD and improving risk sentiment. The 200-day moving average at 111.27 will be the next level of resistance.

GBP/USD:

Spot: 1.2867

GBPUSD continues to linger near 1-month lows, with the pair just hovering above its 50-day moving average of 1.2820; the last time it closed below the 50dma was on 10 Jan. Sterling continues to be pressured following data published by the UK’s Office for National Statistics showed a more severe slowdown than expected in inflation. However, a report coming from EU showing that the Union would favour extending the Brexit date has prevented the pound from weakening further.

Sources: Bloomberg