From Marc to Market:
Overview: The US announcement to lay a 5% tariff on all goods coming from Mexico (starting June 10) until it stops the flow of "illegal migrants" spurred sharp losses in the Mexican peso and general risk-off move that strengthened the yen. The tariffs are set to rise every month until reaching 25%. This is a significant surprise and especially given that the Trump Administration is preparing to formally submit the USMCA to Congress. The legislative ratification process has begun in both Canada and Mexico. The peso is off about 2.8%, the weakest in the world today, while the Canadian dollar has weakened in sympathy. It is off about 0.25%, the most of the majors. The yen strengthened, and this coupled with the exposure of Japanese automakers, (Nissan, Mazda, Honda) which produce autos in Mexico and export to the US, weighed on Japanese shares. China's shares edged lower, while South Korea and Taiwan advanced more than 1%. European markets are lower, and the Dow Jones Stoxx 600 is off nearly 1% to three-month lows. The S&P 500 failed to close the gap left from Wednesday's sharply lower opening, leaving it vulnerable technical position before the action that seems to be a textbook example of cutting one's nose to spite one's face. It is trading nearly 1% lower. Our technical target is 2700-2720. The trade action spurred an extension in the bond market rallies. The US 10-year is near 2.15%, while the 2-year yield is threatening to go below 2%. The German 10-year Bund is at minus 20 bp. Australian and New Zealand benchmark yields are 5-7 bp lower to new record lower. European bond yields are off 2-3 bp mostly. Italy's looming confrontation with the EU and political uncertainty sees the Italian bonds continue to trade as risk assets, and the yield is five basis points higher to push above 2.70%.
Japanese data reported today captures the challenge facing the economy. Unemployment unexpectedly eased last month to 2.4% from 2.5%. Industrial output was up more than expected. The 0.6% rise compares with a median forecast of 0.2% in the Bloomberg survey and a 0.6% fall in March. However, it does not appear to help boost consumption. Retail sales were flat in April. Economists surveyed by Bloomberg forecast a 0.6% increase. Separately, the slowdown in housing starts and construction spending (-5.7% and -19.9% year-over-year, respectively) follows a surge in March (10% and 66.7% respectively). The BOJ did not reduce the amount of bonds it intends to buy in June, but it did reduce the frequency (three days instead of four) for long bonds and widened the range for the 10-year-25-year purchases to JPY100-JPY300 bln up from JPY100-JPY250 bln last month. The net impact was marginal.
Many, if not most, observers are suspicious of Chinese data unless they are weak. The May PMI showed the manufacturing sector slipping back into contraction, with a decline to 49.4 from 50.1 in April. It had recovered from the sub-50 reading in the December-February period. The non-manufacturing PMI was unchanged at 54.3. The composite slipped to 53.3 from 53.4. New orders for manufacturing slumped to 49.8 from 51.4, and new export orders fell to 46.5 from 49.2. In the non-manufacturing sector, new orders and new export orders also fell (50.3 from 50.8 and 47.9 from 49.2, respectively). The disappointing data, even before the full impact of the increase in US tariffs is felt, suggests officials will have a policy response.
In emerging Asia, note that South Korea's central bank kept rates steady. Earlier in reported a stronger than expected 1.6% rise in April industrial output and an upward revision in the March series to 2.1% from 1.4%. However, next week's data will likely to confirm that exports fell for the sixth consecutive month on a year-over-year basis in May and that the economy contracted 0.3% in Q1. May's CPI will also be reported, and as it stays below 1%, there is scope for a BOK rate cut in Q3. Separately, S&P upgraded Indonesia's credit rating to BBB citing better growth prospects and stable policy environment with the re-election of Widodo as President. The rupiah is the strongest currency today, rising nearly 1% against the dollar. The local equity market advanced 1.7% for an almost 3% gain om the week.
The dollar has been sold through JPY109 for the first time since the end of January. In the next few hours, a battle will be waged between two expiring options. There is $1.4 bln at JPY108.50 and $1.5 bln at JPY109. The Australian dollar has been confined to a $0.6900-$0.6940 range this week. There is an option for nearly A$560 mln at $0.6900 that will be cut. The market appears to have discounted nearly a 95% chance of an RBA rate cut next week.
Germany reported disappointing April retail sales and Italy cut its estimate for Q1 growth, while the softer inflation readings are consistent with what was already reported by Spain and France....
Note to Mr. Chandler: with GDP per capita (PPP; IMF) over $40,000, does South Korea still get to call itself 'emerging'?