The market put a positive face on things yesterday after the Trump administration announced a decision to delay auto tariffs for up to six months that would avoid an immediate further spike in trade hostilities, especially with the EU and Japan. The auto tariff issue is very thorny from the US perspective, as the auto parts supply chain is so globalized that it’s virtually impossible to establish tariffs that will only target foreign suppliers, given that US automakers source parts from abroad. The Mexican peso was one of the primary benefactors of this announcement.
Overnight, risk appetite, especially in Asia, soured as the Trump administration moved against China’s Huawei. The company was added to the US Bureau of Industry and Security’s “Entity List”, which will make it far more difficult for the company to source components from US suppliers. This is a considerable escalation that strikes at the heart of the “technology transfer” and national security angles that will make it difficult for the US and China to agree on any deeper trade deal.
The Australian dollar is modestly lower overnight after a mixed jobs report that was largely read as sufficiently weak to up the odds of an impending Reserve Bank of Australia cut. While the headline payrolls figure was positive, all of the gain was in part-time employment. As well, the unemployment rate jumped to 5.2% from 5.0%, even if some of that rise was for the “good reason” that the participation rate increased 0.1%.
Sterling has headed lower still this morning as UK Prime Minister Theresa May is expected to recycle her Brexit deal for an early June vote that few see has any chance of passing. Cross party talks continue to go nowhere. It is likely May will have to bow out after a failed vote and the long-term situation remains as uncertain as ever. Sterling could continue to suffer with an uncertain global market backdrop.
Ugly US data out of the US yesterday, with core Retail Sales actually dropping month-on-month (the recent few months have shown considerable volatility, but US consumption growth has clearly slowed this year). Industrial production was also very weak with an ugly, -0.5% month-on-month drop that takes the year-on-year rate to near 1%. US Treasury yields are slipping ever lower, with the 10-year benchmark approaching its cycle low and two-year rates already there as the market is beginning to price in two Fed rate cuts by the end of the year.
Sterling is under significant pressure and could explore the full range in GBPUSD toward the 1.2500 area on the other side of another failed vote in early June after slipping below the 1.2900 area.