Global financial markets were unsurprisingly shaken by the escalation of geopolitical tensions, as US President Trump implied in a number of tweets his intention to place a 10% tariff on an additional $300bn of Chinese goods from the 1 September, later adding that these rates could rise to “well beyond 25%”. Given also the Japanese Cabinet’s decision to officially remove South Korea from its ‘white list’ of 27 countries with preferential trade status, Asian equities tanked overnight. Indeed, Japan’s Topix declined more than 2% overnight, China’s CSI 300 fell 1½% and Korea’s Kospi was down almost 1%.
Heightened uncertainty about the global economic outlook saw significant shifts in bond markets overnight too. Certainly, the move in JGB yields was noteworthy, with the 3bps drop more than reversing the gain seen the previous day to -0.17%, matching its lowest level since 2016. Meanwhile, a weaker than expected Aussie 10Y auction exacerbated the moves in that country’s domestic bond markets, with 10Y yields down a whopping 12½bps to 1.08%. So euro area bond markets have unsurprisingly open higher, a move that might well be strengthened by today’s euro area retail sales release, which is expected to confirm a moderation in household consumption growth in Q2.
Of course, Gilts had already shifted higher yesterday as the Bank of England presented a more downbeat assessment of the near-term outlook, forecasting growth to remain below potential over the next few quarters, not least as business investment was expected to weaken further. And while the MPC continues to assume a smooth Brexit in its economic projections, the BoE’s confidence that a deal on Brexit will be reached by 31 October has clearly diminished. So, given the significant uncertainty surrounding the Brexit outlook, and increased risks of a no-deal Brexit, Carney reiterated in his press conference that the MPC will “take all appropriate measures to support jobs and activity, consistent with achieving the 2% inflation target commitment”. Please read yesterday’s euro wrap-up for more details. Of course, the chances of Johnson pushing ahead with a no-deal exit at the end of October were reduced somewhat by yesterday’s Brecon and Radnorshire by-election result, which saw the Liberal Democrats oust disgraced Tory candidate Chris Davies, to leave PM Johnson with a working majority of just one.
While markets will no doubt continue to digest the escalation of geopolitical tensions, attention in the US today will also be on July’s labour market report, with non-farm payrolls expected to have risen by a healthy 165k, albeit down from the surge (224k) seen in June. As such, the unemployment rate might well tick lower, by 0.1ppt to 3.6%. Meanwhile, average hourly earnings growth is expected to be unchanged at 3.1%Y/Y. Today will also bring the full trade report and revised durable goods orders figures for June, as well as the final University of Michigan’s consumer sentiment survey for July.
Focus in the euro area today will turn to the household sector, with euro area retail sales for June set to provide a guide to household consumption in Q2. While total sales are expected to have increased by 0.3%M/M, this would merely reverse the decline in May, to leave sales broadly flat over the quarter as a whole. This morning will also bring the latest euro area PPI figures for June, as well as Italian industrial production data for the same month.
Following yesterday’s weak manufacturing PMI, today’s equivalent construction sector survey is unlikely to offer much optimism about the UK’s near-term economic outlook either. While the headline PMI is expected to have risen in July, this followed a collapse in June to a ten-year low of 43.1, and is therefore likely to still indicate another steep decline in activity.