Morning Report: 3 May 2018

May 3, 2018

GBP. Sterling managed to stem its losses yesterday, trading essentially flat vs USD and posting a minor rally against the euro. The Construction Purchasing Managers’ Index printed at 52.5 for April, showing a rebound from last month’s freeze. Construction was the main drag on last week’s poor Q1 Gross Domestic Product figures, so yesterday’s improved survey data was an encouraging sign that the economy would return to a higher growth rate in the second quarter. This morning’s political drama, stemming from doubts about Theresa May’s ability to maintain cabinet support for her customs union plan, has gone largely unnoticed by sterling. Services PMI will be released at 09:30 BST.

EUR. Euro declined for the third day in a row against USD, which contributes to a bad start for the month of May for the single currency. The first reading of Q1 Gross Domestic Product came out bang on expectations, confirming the forecasted slowdown, although fears of an even more drastic deceleration proved ungrounded. Today’s data calendar promises something to chew on, with the Flash Consumer Price Index reading for the Eurozone at 10:00 BST and European Central Bank speakers Praet at 12:00 and Constancio at 13:00.

USD. The current theme of broad dollar strength continued yesterday, with only AUD and JPY making incremental gains out of the G10 currencies. On the release of the Federal Open Market Committee Rate Statement, USD initially took a firm hit, but shortly after began to rise from the floor in a Mohammed Ali-esque fashion to close near 2018 highs. Markets have initially been spooked by the Fed prominently stating that the 2% inflation target was “symmetric” for the first time. The previous market assumption was tilted to inflation undershooting this level, and thus the decision to include this word was seen as mildly hawkish move, suggesting a fourth hike is increasing in likelihood. The futures market now implies a probability of 30% for a fourth rate hike this year. Today sees US labour market data such as Nonfarm Productivity and Unit Labour costs released at 13:30, with Services PMI at 14:45 and Durable Goods Orders at 15:00.

CAD. The loonie experienced a fairly mixed day yesterday; trading flat against sterling, making marginal gains against the euro, whilst losing out to the dollar. The Financial Post reported yesterday that US Trade Representative, Robert Lighthizer, wanted to reach a new NAFTA deal in the coming weeks. With US Congressional elections in November, Lighthizer doesn’t want to run the risk of ratifying a new NAFTA deal coinciding with elections, as Congress does not resume until January. Another interesting story came from the Chief Executive of Bunge, the world’s biggest oilseed processor, who stipulated that Canada is a beneficiary of the US-China trade war. He stated that Chinese buyers have already reacted to possible tariffs imposed on US soyabeans and have found an alternative supply in Canada and Brazil. Today at 13:30 BST the Trade Balance will be published.

UK news

  • Financial Times: Tory ministers revolt against May on idea of ‘customs partnership’. Theresa May’s Brexit customs compromise was derailed on Wednesday after Eurosceptic Tory cabinet ministers revolted against a “hybrid” solution they see as unworkable.
  • Wall Street Journal: Why Xi’s Hands Are Tied in Trade Talks With U.S. A U.S. delegation led by Treasury Secretary Steven Mnuchin arrives here on Thursday with a list of asks for President Xi Jinping: reduce China’s trade surplus with the U.S., better protect intellectual property, and end policies Washington says favour large Chinese companies and discriminate against American businesses.
  • Wall Street Journal: Global Stocks Fall After Fed Statement Stocks in Europe and Asia mostly fell Thursday following declines in the U.S., in part as investors parsed the latest signals from the Federal Reserve.

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