Friday, August 2, 2019

Another 10% tariff on US$300 Billion Chinese goods; Non-farm is coming!

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Recap of the day: Stocks sank on Trump’s new China tariffs

Trump’s twitter again became every newspaper’s headlines today, as he tweeted imposing 10% tariffs on further US$300 Billion of Chinese goods, taking effect on Sept 1. Goods including smart-phones, laptop computers and children’s clothing were also on the list, and they will come on top of the 25% tariffs which has already placed on some US$250 Billion Chinese goods. Overall, almost all trades with China will be subject to new taxes starting from Sept 1.


DJIA had originally surged up 300 points, turning to end 280 points lowered after Trump’s tweets.The CSI 300 Index declined 2.2% when it opened this morning, while the offshore yuan weakened 0.2% to 6.9692 per dollar to approach the key 7 level.

Dollar Index lost 0.2%, after earlier coming within a hair’s breadth of its 2019 peak. US Benchmark 10-year yields fell as low as 1.87%, the lowest since Nov 2016. The new escalation of trade war has boosted more market players to believe the Fed will have a further rate cut in Sept, with CME Fedwatch Sept rate cut probability surging up to 84.2%.


Other than Trump’s Twitter feed, ISM Manufacturing PMI was released yesterday and recorded at 51.2%, a decrease of 0.5% from the June reading, worse than the market consensus, though the expansion of economic activity in the manufacturing sector has now been growing for 123-consecutive months.

Despite being below expectations, the PMI figure was simply not enough to pressure FOMC to launch a further rate cut and embark on a full cut cycle, which has somehow justified the Wednesday Fed decision.

Today’s analysis: The last climax of the week is Non-farm payroll

It is expected that the market will keep digesting the new tariffs, without any doubt the global stock market will be generally trading lower in the early session. However, the new escalation of trade war has quickly changed the markets view on the Fed and a further rate cut in Sept, which has the potential to be an overreaction once. The Fed may not have enough room to cut rates further within just a month, which will be the case if we see the continuation of the better-than-expected economic figures from the US.

Today’s non-farm payroll release for July may be another example of the difficulty facing the Fed, as we expect that the labour market in the US will still show a bright spot in the US economy. In June, new job openings surged up by 224k, beating up the market forecast for a 160k increase, despite the unemployment rate inching up to 3.7% and the average hourly wage growth remaining at 3.1% y.o.y.

At GMT+4 16:30, the US will release the Non-farm payrolls report for July, the market projection of today’s NFP is 169k, down from the prior month reading at 224k, while the unemployment rate kept steady at 3.7% with the average hourly wage growth inching a bit to 3.2% y.o.y. It is expected that although the US-Sino trade negotiations are still uncertain, and that the manufacturing figures for the US have been under pressure as well, the job market has been the constant out-performer, especially comparing to other parts of the world.

Therefore, it is expected that to a large extent, the new job openings figure may be better than the market projection today while the unemployment rate may keep steady at the 50-year low, as the Fed’s latest Beige book also mentioned that businesses reported adversities in filling open positions.

If anything, there is a chance that the wage growth today might disappoint, with the economic outlook for the US and the global economy fading, businesses may reject to hire people with higher salary. It is expected that the growth at 3.1% y.o.y. is more reasonable.

The dollar may drop a bit further today should the wage growth be under expectations, however we believe it would not change the overall picture of the US economy even if today’s data arrives worse-than-expected, the US economy is still generating jobs growth well above 100k level and the pay growth remains at the fastest pace since the financial crisis, which will justify our stance that the Fed may not take further action as soon as September.