Financial market research and analysis

Trumps announcement of a potential further $100 billion of tariffs on China briskly ended any hopes of an amicable conclusion to escalating trade tensions, initially sent Asian markets tumbling, along with European and US futures sharply lower,.Whilst the knee jerk reaction was a heavy sell off from traders, markets since pared some losses, with Asia closing mixed and Europe still pointing to a lower start but less extreme than when the news broke.  Thursday’s impressive rally is under threat as Trump retaliates to China’s tit for tat tariffs and its willing to escalate its trade problems with Trump to the World Trade Organisation, in the clearest sign yet that the world’s two largest economies remain teetering on the brink of a trade war..

The message from the White House has been mixed at best this week, with White House advisor Larry Kudlow and other officials playing down any trade war fears, which worked to boost the markets. However, much of the good work by Kudlow & Co. was undone by Trump on Thursday evening, who is showing an increasingly hard-line approach..

NFP & Powell’s Speech

Today sees two potentially high impacting events (in addition to escalated trade war fears), which could inject some volatility into the dollar. First, at 12:30 GMT the release of the US Labour Departments non-farm payroll. This is followed at 17:30 GMT by a speech by Fed Chair Jerome Powell on the economic conditions, which will be closely watched for any clues on policy outlook.

The US is expected to have created 195k new jobs in March, a decline from the unexpectedly strong 313k created in February. The unemployment rate is expected to have ticked lower to 4% from 4.1% in the previous month, which will take it to the lowest level in 18 years. Finally, earnings growth is forecast to increase 0.3% month on month and 2.7% year on year, up from 2.6% in February.

Earnings Element In Focus

As has been the case with NFP reports over the past year, traders are expected to focus mainly on the wages element of the report. We need only think back to February’s report when a surprisingly strong earnings growth number sent treasury yields soaring, stocks heavily lower and the dollar into mild recovery mode after falling sharply for most of 2017.

Earnings growth is considered a precursor to higher inflation later on. Inflation in the US remains below the Fed’s 2% target, which is the biggest potential hurdle to more aggressive monetary policy. Therefore, any signs of increased inflationary pressure from higher wages would boost the chances of a steeper path of rate hikes from the Fed and therefore lift the dollar whilst pulling stocks lower. On the other hand, any signs that earnings growth is weak tends to weigh on the dollar whilst boosting stocks.

Neutral Tone From Powell?

The second key event will an appearance by Jerome Powell as he gives a speech on the US economy. Whilst investors will be listening closely for any monetary policy clues, the amount of fresh news could be limited given his last appearance was just a few weeks ago. Since his last appearance US economic data has remained roughly level, inflationary pressure has barely ticked higher, but downside risk from a potential trade war has picked up strongly. As a result, we are expecting Powell to hit a neutral note on policy for the time being.

The CME Fed Funds is currently pricing in an 80% probability of a rate hike in June. It would take a seriously disappointing number for the probability to shift noticeably lower. On the other hand a strong reading particularly from earnings and a hawkish sounding Powell could boost this probability, lifting the dollar in the process.

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