We await Brexit votes, CPI reports, Trump-Kim summit and FOMC, ECB and BOJ decisions. The biggest risk to be in U.S. rates with supply today the focus. The inflation trade and CPI Tuesday lingers over macro views with many waiting for a 3.015% break, writes Bob Savage.
The right way to think about the U.S. policy noise maybe in the sequencing of big goals.
Most analysis about trading markets today is about the surprise that the G7 failure doesn’t matter and risk-on into the FOMC, ECB and BOC meetings seems crazy.
For the Trump, the the photo op with Kim and a Korea peace treaty matters far more than being nice at the G7 Canada meeting.
The role of North Korea in the discussions over trade with China matters far more than the G7 meetings as it may be a bigger leverage for trade there. What we are witnessing is a reordering of what foreign policy in the U.S. Real politics are turned upside down since the Clinton/Bush regimes when economics become more important than military interests. The G7 did agree on this – but Trump blinked at the last minute to make a point. “We acknowledge that free, fair, and mutually beneficial trade and investment, while creating reciprocal benefits, are key engines for growth and job creation,” the G7 leaders said in the joint communique. “We recommit to the conclusions on trade of the Hamburg G20 Summit, in particular, we underline the crucial role of a rules-based international trading system and continue to fight protectionism. The leaders added that they “commit to modernize the WTO to make it more fair as soon as possible. We strive to reduce tariff barriers, non-tariff barriers and subsidies.”
There is nothing here that should worry investors about an unwinding of global trade orders but if they are it will show up in those who have to borrow money – like the U.S. and EM world. The sequences of news headlines Sunday is still worth paying some attention to:
1) Italy rallies. The new Italian economy minister Tria ruled out leaving the EUR and promised to focus on structural reforms over deficit spending. The euro (EUR) announcement led to a big rally in shares and bonds across periphery nations in EU.
2) Oil lower. Reports suggest that Saudi and Russia have upped oil production already ahead of OPEC. This week’s OPEC and IEA monthly reports will be important.
3) South Korea won (KRW) flat? The North Korea media states that the summit will discuss a permanent, firm peace regime and denuclearization of the Korean peninsula. USD/KRW has now gone 68 days without a 1% move and 90 days without the pair moving 2% or more from its 55-day. The KRW implied volatility is also low historically. Expect some reaction to this event.
4) Canadian dollar (CAD) lower. The Trump reaction to the failed Canada G7 meetings brings more fears of escalation about U.S./Canada tariffs with autos the next in line. Escalation of tensions in the auto sector is a huge risk given its importance to both the U.S. and Canadian economies. Autos represent 15% of Canada’s total exports and around 19% of imports.
5) Chinese yuan (CNY) steady. The alternative to G7 meetings this weekend was the Shanghai Cooperation Operation with India, Russia, Pakistan, Mongolia and China key players reaching a consensus on defending and developing a multilateral trade system, resolving conflicts inside the region within the framework of international law, and strengthening cooperation in politics, security, economy and culture.
6) Norwegian krone (NOK) lower. The Norway May CPI rose 0.1% m/m, 2.3% y/y after 2.4% y/y – less than the 0.3% m/m, 2.5% y/y expected This puts the CPI reports for the week ahead that much more in focus as the inflation worries globally fester.
View Bob Savage at TradersExpo New York in brief video interviews recorded Feb. 9:
How to create a risk parity portfolio
Duration: 3:25
How I pick assets on the basis of highest yield
Duration: 3:31
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