The deadline passed for comment on the tariffs targeting $200 billion of Chinese exports to the US, and so far no implementation schedule has been set. The markets continue to await the outcome of US trade negotiations.

Signs of Rising Inflation

The US economic reports confirmed the strong performance of US equities. Last week’s ISM Manufacturing report surprised analysts, coming in at 61.3, the highest in 14 years of data. The 2.9% rise in wages from the same period last year was certainly a confirmation that wage-inflation is real. Add the potential increase in import prices from the trade war, the Fed will be left with no choice but to raise rates at a quicker pace.

Hold Your Breath

Trump upped the ante by threatening more tariffs on an additional $267 billion of imports from China. Markets went wild on Friday as the debate on Trump’s true intentions raged on. Over the weekend, we also read reports of Trump’s plans to impose sanctions on perpetrators of intellectual property theft, with reference to “malicious cyber-enabled activities.”

While bluffs can be taken too far, it is important to note that no final decision has been taken on the $200 billion currently under discussion. The public feedback period ended, and an “evaluation” period has started. We do not doubt Trump’s resolve to fix what his Administration termed as a “broken world trading system,” but we do recognize Trump’s disposition toward hyperbole.

Last week’s deficit figures did not help alleviate concerns. The trade deficit with China deepened to $36.8 billion. To put this in context, the trade deficit with the entire EU stood at $17.6 billion. China made an effort to prevent the “currency manipulator” label by reintroducing its counter-cyclical factor in FX management, effectively putting a stop to further depreciation of the yuan against the US dollar. We see this as a positive sign that China has resolved to appease Trump.

If negotiations fail and there is an all-out trade war between the US and China, we do not see the yuan backstop holding. A market sell-off of yuan is the natural reaction to account for the lower inflows of trade dollars. The PBOC will also have little incentive to continue with its counter-cyclical factor adjustment, and a lower USD/CNY will become the desired policy objective.

On the bright side for China, exports are near still growing with the US and the rest of the world. Despite the trade war, we see China’s 2018 exports exceeding 2017’s all-time as we roll through the end-of-year festivities. Even a 25% tariff with its largest trading partner will not put a stop to China’s global export machine.

The US dollar’s Ascent

August was not kind to Emerging Market currencies, but the first week of September saw a bounce in the TRY, up 2.5%. We see this bounce as temporary until Turkey implements some credible measures to stop capital outflow. A look at FX rates in the first week of September highlights the return of dollar risk to Emerging Markets. South Africa’s rand is down 3.5% and the Russian Rubble is down 3.3% month-to-date.

The trade war is not helping. China’s PBOC drew the line in the sand on further depreciation in the yuan. The pressure on the Mexican peso and Canadian dollar from NAFTA negotiations will likely continue in September, with both dropping around 1% in the first week.

Ukraine hiked rates on Thursday to defend its currency, which has been on a relentless downward trajectory for the past two months. The Ukrainian hryvnia is still down 6.8% vs. the US dollar over this period.

SEK, which has been extremely weak of late, should be interesting this morning after Sweden’s tight election outcome.

The Week Ahead

We have a few important data releases this week, and we continue to watch for developments out of Turkey. Friday’s release of Turkey’s Current Account Balance is of note.


The US reports Consumer Credit, Wholesale Trade and Inventories. The UK reports its GDP, Trade Balance, Construction Output, Manufacturing, and Industrial Production.


The UK reports its unemployment figures. Germany reports ZEW Survey Expectations. South Africa reports Manufacturing Production. Mexico reports on Industrial Production. Russia publishes its Trade Balance.


France reports CPI and PPI. Italy and Portugal report GDP and CPI. Spain reports Retail Sales. The Eurozone reports Unemployment Rate and CPI figures. India reports its Fiscal Deficit and GDP. South Africa reports its Trade Balance. Brazil reports GDP and Budget Balance figures. Japan reports Vehicle Production, Construction Orders, and Housing Starts. Hong Kong reports M1, M2 and M3 Money Supply. Canada reports Industrial Production. Thailand reports Foreign Reserves and Balance of Payments Current Account Balance. Poland reports GDP and CPI. Norway reports Unemployment Rate

The US reports PPI and MBA Mortgage Applications. The Eurozone reports Industrial Production. Spain reports CPI. Italy reports on Industrial Production. South Africa reports Retail Sales. India reports CPI and Industrial Production. Japan reports PPI and Core Machine Orders. Russia reports CPI. Australia reports its Unemployment figures.


The Ust was not S reports CPI and Jobless Claims. China reports Industrial Production. The ECB will set its Main Refinancing Rate, Marginal Lending Facility, and Deposit Facility Rate. Germany, Ireland, and France report CPI. Sweden reports GDP. Greece updates its unemployment figures. Brazil reports Retail Sales.


The US reports University of Michigan Sentiment, Capacity Utilization, Industrial Production, Retail Sales, and Import/Export Prices. Turkey reports its Current Account Balance. Japan reports Industrial Production. India reports Wholesale Prices. Sweden reports CPI.



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