Buckle up.

There is no doubting the man and, like his business dealings, one never knows if you have done a deal or if the deal will be honoured. Confusion is a tactic and it is used well. Just when the Chinese and his trade negotiation team were starting to feel that they were looking like getting somewhere, Trump has waded in on the talks and has threatened China with doubling tariffs. Perhaps he smells weakness or Xi Peng’s desperation to get a deal but either way it appears as though the goalposts were just moved.

Trump is apparently not happy with the speed of negotiations and wants something done. With the elections due in about 16 months, he wants to show something to his supporter base. Trump appears to be somewhat concerned that China appears to be trying to backpedal on its earlier commitments and especially so on the crucial matter of technology transfer. He has suggested the possibility of an additional 25% tariff on Chinese imports not already covered. Trump had hoped to announce something Friday.

The change in sentiment may have an impact on commodities but it may also dampen enthusiasm for risk assets. Risk assets performed well on Friday following the release of the jobs report and were expected to perform this week. Trump’s tweets may have just stopped that rally. What’s more, if China calls Trump’s bluff then we are staring down the abyss of a trade disaster.

With major U.S. stock indices trading at record highs or near record highs built on good economic data and a trade deal with China, an unravelling of the trade deal could send the stock market into risk-off mode very quickly.

For China, the addition of further tariffs would be a drag on growth. It is estimated that the current level of tariffs is about a 0.5% drag on Chinese GDP. An increase to 25% new tariff on goods would raise that drag to 0.9%.

The additional tariffs would then combine to produce a drag on the Chinese economy of 1.5%. (Bloomberg Economics) If your economy is growing at around 6% then this drag is significant. And for Powell if he is looking for inflation, the additional tariffs may find their way to the end consumer and as we all know tariffs are taxes.

Friday, we got the jobs report and the unemployment rate is now at a 50-year low, the best since December 1969. Strong hiring helped seal optimism and stocks rallied. What was disappointing in the number, however, was that wages continue to lag.

The unemployment rate fell to 3.6%, 263,000 new jobs were added. Average hourly earnings rose 6 cents, or 0.2% in April. The annual increase in wages remains steady at 3.2%. The ISM, however, hit a factory low for 2 ½ years which is suggesting that despite the jobs growth the economy may be slowing. The big issue for the U.S. economy is significant underemployment.

The Nasdaq -100 Index climbed to a new record despite Tesla. Tesla also managed to get away its $2.35 bio debt and stock offering. For the main boards, energy stocks and the energy sector remain an issue. With the S&P 500 up about 10%, energy companies are down about 13%.

Energy companies are pricing in a risk-premia even though energy prices are rising. Amazon rose 3.2% after it was disclosed Berkshire Hathaway had been investing. Consumer discretionary rose 1.5%. Over the week, the Dow slipped 0.2% whilst the S&P 500 was up 0.2%. Friday’s volume was slightly less than the average volume traded.

The Rant.

We are now a decade in the Goldilocks era. To confuse the matter further, James Bullard (St Louis Fed President) and Charles Evans (Chicago Fed President) both laid out cases for possible rate cuts. Both expressed concern over persistently low inflation. The Dallas Fed President also added his voice to the rate discussion.

Robert Kaplan was concerned about low inflation and cited technology companies such as Amazon and Lyft delivering goods and services at lower prices. He also suggested that as companies merge to gain scale this had led to falling prices being used as a competitive edge. He also noted that the natural rate of unemployment may be lower than previously thought and that inflation with these levels of unemployment may not be that surprising. (Kaplan does not vote).

Market Recap.

Equities: The S&P 500 rose 0.96% and the Dow rose 0.75%.  The Vix closed at 12.87 while the Stoxx Europe 600 Index rose 0.4%.

Currencies: The Bloomberg Dollar Index fell 0.4% while the euro rose 0.3% and the pound rose 1.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.53% while the 2-year is trading at 2.335% and the 30-year is at 2.922%. The U.S. curve closed on the day with the following closes 2/10 at 19.00 bp, 2/30 at 58.4 bp and the 10/30 closed at 39.2 bp. The U.S. 5-year closed at 2.327%. The 2/5 spread is now -1.2 bp. The ten-year bund closed at 0.023% and the British gilt closed at 1.221%. The 10-year yen gilt is trading -0.031%.

Commodities: WTI rose 0.2% and gold rose 0.7%.

Bitcoin is trading around $5,772.

Aussie Market Today.

Aussie equities will no doubt be swayed by Asian markets today. How the market performs today will be very much decided by whether Asian traders feel that trade talks could collapse. My suspicion is that we may have a choppy period. Expect the ASX to be subdued as investors determine the economic outlook.

Bonds should be steady. Bond yields staged a small rally overnight and with issues relating to trade we could see another period of risk off. Credit remains bid but looks slightly weaker on the day. The Aussie remains under 70c and that could spur some offshore buying. With the election looming, bonds are unlikely to do anything too dramatic.