Daily Brief

Daily Brief

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Summer slowdown

Tariffs: the new panacea

The American president has had such success with his tariffs against China that he has been seeking new and inventive ways to employ them. At the end of last week he announced a coercive tax on Mexican goods, not in response to any trade imbalance but as a punishment for cross-border migration.

A day later the administration said America would remove India and Turkey from its list of developing countries and would end their preferential tax treatment. These new and unexpected escalations of America First rattled financial markets. Investors who were already worried about the trade war with China became yet more anxious. From Tuesday's high the Dow Jones 30 equity index has fallen 5% and the safe-haven Swiss franc and Japanese yen are up by 1.0% and 1.6% respectively.

It has not been positive for the US dollar. Where once investors saw tariffs as exerting an upward pressure on inflation and interest rates they now see potentially downward pressure on the US economy. Futures pricing implies two rate cuts from the Fed before the end of the year. Partly for that reason the US dollar was the weakest among the majors on Friday, losing a third of a cent to sterling.

Politics: the old problem

On Friday the US president named Boris Johnson as his "excellent" nominee for leader of the Conservative party. He also advocated a no-deal Brexit and said a trade deal with the US would leave Britain better off because it is "the number one country by far".

Mr Johnson remains favourite with the bookies at 6/4. The list of candidates now runs to 13, Sam Gyimah having joined the race at the weekend. He is the only one so far to call for a second referendum.  

There are troubles on continent too: German chancellor Angela Merkel's junior coalition partner, the SDP, lost its leader with the resignation of Andrea Nahles. Ms Nahles took the bullet for her party's poor showing at the European elections. Meanwhile the German Greens have overtaken Ms Merkel's CDU to top the opinion polls. It is not only in Britain that the political outlook is cloudy.

PMIs: the monthly fix

On balance, today's manufacturing sector purchasing managers' index readings are expected to be lower than a month ago. The UK measure is pencilled in at 52.4 for May, down from April's 53.1. Figures already released confirm a flat-to-lower trend.

Australia's AIG performance of manufacturing index fell two points to 52.7 and Spain was down from 51.8 to 50.1. China's Caixin PMI was unchanged at 50.2. The only improvement was from Japan but at 49.8 it was still in the sub-50 contraction zone. Of those yet to be announced, Italy, Germany, Euroland and Canada are forecast to deliver sub-50 readings, all of them lower or unchanged on the month. Analysts expect the best score from America's ISM, at 53.3.

Tonight the Reserve Bank of Australia announces its monetary policy decision. There would be considerable surprise if the RBA were not to cut its Cash Rate by 25 basis points from 1.5% to 1.25%

GBP: Trump names his man

GBP: Trump names his man

USD: Blunderbuss tariff tactics

USD: Blunderbuss tariff tactics

EUR: German coalition wobbles

EUR: German coalition wobbles

JPY: The favoured trade war bunker

JPY: The favoured trade war bunker

AUD: Rate cut expected tonight

AUD: Rate cut expected tonight

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