A Trade Deal, Of Sorts, Shores Up Sentiment

WHERE WE STAND – We have a trade deal!

Well, it’s not actually a deal, instead being an ‘Agreement in Principle’ between the UK and US, though at least it’s finally some sort of concrete progress on the trade front. I’ve got to be honest, though, ‘The Art of the Agreement in Principle’ doesn’t have quite the same ring to it.

In short, the agreement, which will be written up “in the coming weeks”, is said to increase market access for goods such as beef and ethanol, while also reducing tariffs on UK auto exports to the US, albeit subject to a 100k quota. Furthermore, ‘non-tariff barriers’ are to be reduced, though frankly details are incredibly thin on the ground, particularly around the duration of the agreement, with reporting noting that the deal may be a 12-month long temporary arrangement, in the hopes of a more comprehensive free trade deal being made in the coming months.

Of most importance, and interest, though, is the fact that the ‘baseline’ 10% tariff announced by President Trump on ‘Liberation Day’, and which was not part of those tariffs subject to the 90-day pause, remains in place. This is worrying enough on its own, but even more so considering that Trump is a huge fan of the UK, and that the US actually runs a trade surplus with Britain. If this is how Trump treats his ‘friends’, then how do we reckon he’ll act towards his ‘enemies’? China, and the EU, should probably brace for chunky tariffs to remain in place for some considerable time, deal or no deal.

Anyway, agreement of that deal – or whatever you want to call it – did give sentiment a bit of a shot in the arm yesterday, with stocks rallying on both sides of the pond, while the dollar caught a bid across the board. Comments from Trump expressing a chunky degree of optimism over this weekend’s trade talks with China also gave things a helping hand.

I remain inclined to fade upside in both, however, particularly with the degree of uncertainty remaining high, the full economic impacts of tariffs yet to be borne out, and markets clearly not at all priced for a scenario where the average effective tariff rate could settle in the mid-teens, even after trade ‘deals’ are made.

Away from the trade front, the central bank bonanza continued throughout the day. Both the Riksbank and Norges Bank kept policy on hold, in what were relatively straightforward decisions, with policy guidance also unchanged. That same adjective can’t be used to describe what happened on Threadneedle Street, as the Bank of England descended into shambles once more (if they ever escaped that status, that is!).

The MPC duly delivered the 25bp cut that participants had been expecting, lowering Bank Rate to 4.25%, though said cut came by virtue of a very rare 3-way split – 2 policymakers (Mann & Pill) preferred to hold rates steady, while another 2 (Dhingra & Taylor) dissented in favour of a 50bp cut. At least we can’t accuse them of ‘groupthink’, I suppose.

Along with that mess came a policy statement which saw the MPC’s now-familiar guidance reiterated, noting that a “gradual and careful” approach remains appropriate, and that policy must “remain restrictive for sufficiently long” in order to ensure price pressures don’t become persistent. No dovish pivot here, despite expectations.

Also, no dovish pivot, despite an updated slate of economic forecasts that pointed to slower growth, higher unemployment, a lower inflation peak, and a more rapid return to the 2% target (now Q1 27 vs. Q4 27 prior). Frankly, I’ve no clue what the BoE are thinking here, though for the time being a June cut doesn’t seem on the cards, with the MPC likely now holding fire until August. That said, the ‘gradual and careful’ approach does feel like its on borrowed time now, and by the back end of summer, if downside risks have materialised, more sizeable rate moves may well be needed, given the stiff headwinds that the UK economy continues to face.  

LOOK AHEAD – Finally it’s Friday, and almost time for a cold beverage or two to see in the weekend.

Before that, though, there are a few bits & bobs to get through. The data docket is relatively empty, with just last month’s Canadian jobs figures due, likely pointing to a modest rise in unemployment, along with relatively contained earnings growth. money markets, per the CAD OIS curve, currently price the next BoC meeting on 4^th June as a coin flip.

Elsewhere, while the earnings docket is barren, it’s a busy day of central bank speakers up ahead. The end of the FOMC’s ‘blackout’ period sees six policymakers take to the wires, while we’ll also hear again from BoE Governor Bailey, as well as Chief Economist Pill.

Lastly, do bear in mind the potential for de-risking into the weekend, and gapping risk at the Sunday/Monday re-open, especially with US-China trade discussions set to take place. I see risks skewed to the downside here, in terms of sentiment, given the highly unlikely scenario where a major breakthrough is made, but the very possible scenario where tensions end up escalating further.