The outlook for Fed rate hikes has shifted as the trade dispute has begun to bite. However, is this a move that has gone too far as the US pulls back from tariffs on Mexico. The US consumer indicators could be key. We consider the outlook on forex, equities and commodities.
There has been a significant shift in sentiment in recent weeks. Fearful of negative implications of an escalation in the US/China trade dispute, traders have flooded to the safety of high grade government debt (bonds), into safe harbours of the Japanese yen and Swiss franc (forex) and the traditional go-to play of gold (in commodities). Although the China trade dispute could drag for months, Trump’s protectionist US administration has been jabbing elsewhere too. This time with its second biggest importing partner, Mexico (around 13% of US imports). Investors are already worried about the global growth implications of the US/China trade dispute, which the IMF believes could take as much as -0.5% off global GDP (c. -$455bn) in 2020. However, picking a scuffle with Mexico just exacerbates market fears. What next? After all, the US has only just agreed a trade deal with Mexico and Canada. The EU leaders will be nervous. Traders have priced between two to three rate cuts from the Fed this year now. Analysts have been falling over themselves to slash year end forecasts on Treasury yields. Currently around 2.13% on the US 10 year yield, JPMorgan are going for 1.75% by year, NatWest are 1.85% and Commerzbank 1.25%. However, given that the US economy (and the dollar) will still be seen as a relative outperformer on the trade dispute, other major central banks are also pivoting dovish. The RBA, RBNZ and ECB are all on that path. Whilst safe havens will perform well, it is still not a time to bet against the dollar in the medium term.