Market Update

The optimism following last Friday’s (3 May 2019) strong US payrolls report, indicating robust job creation growth without signs of wage pressure, was short-lived.
Two surprising tweets from Donald Trump on Sunday (5 May 2019) caught everyone off guard and significantly shifted the financial market’s sentiment: seeking more concessions from China, Trump escalated tariffs on Chinese goods.
However, it's crucial not to succumb to panic. While the tweets have negatively affected equity markets this week, concentrating on the worst-case scenario – a breakdown of talks and retaliatory tariffs – it's vital to note that negotiations are still ongoing. In fact, China’s chief trade negotiator, Vice Premier Liu He, traveled to the US for further talks on 9 & 10 May 2019, indicating their commitment to continuing discussions and reaching an agreement eventually.
Past experiences from the last year or so have shown that equities can still rise, especially as Trump’s tweets often don’t materialize as he states. Even if higher tariffs lead to increased CPI inflation, major central banks are likely to maintain their dovish stance to support economic growth, which should benefit equity markets.
Moreover, Trump’s intention was evidently to shake up talks and expedite negotiations rather than kill any trade deal, suggesting that the recent market sell-off might be short-lived.
Additionally, China’s data this week implies that it is in their best interest to work toward an agreement rather than challenging Trump, as the data shows a 2.7% drop in China’s exports in April (resulting in a monthly trade surplus decrease from $32.64 billion to $13.84 billion). The IMF also believes that an all-out trade war with the US would reduce China’s economy by 1.5%.
Regrettably, the resurgence of US/China trade tensions overshadowed this week’s economic data.
Both core and headline US CPI inflation for April increased by 0.1% to 2.1% and 2.0% respectively. While this provides support for the Fed Chairman Jay Powell’s claim that the recent slowdown in inflation is temporary, it's important to note that US PPI (producer price inflation) rose less than expected in April. Excluding food and energy, producer prices increased by 2.4% compared to a year earlier. Since this data measures wholesale and other selling costs at businesses, it indicates that inflationary pressures affecting consumers (CPI inflation) are likely to remain subdued.
In the UK, the economy expanded by 0.5% in the first quarter, primarily due to companies stockpiling ahead of the original Brexit date of 29 March 2019, contributing 0.7% to growth during the quarter. However, rolling month-on-month GDP data indicates a 0.1% contraction in March, suggesting a slowdown in Q2 2019 as stockpiling unwinds. Moreover, several companies, including BMW’s Mini and Peugeot’s Vauxhall car factories, proceeded with planned Brexit-related shutdowns in April, which will also impact Q2 GDP data.
Looking ahead to next week, the UK will release employment data (unemployment rate and weekly earnings); the US will report retail sales and the University of Michigan Consumer Sentiment Index; the Eurozone will publish CPI and Q1 GDP figures; and China will release retail sales data.