Optimism on EU-US trade talks sees dollar and equities gain

With more positive noises about the EU and US moving to negotiate a new trade agreement, the dollar took back a little ground yesterday.  The single currency had kicked off the week popping above $1.14 to the dollar, but some better US consumer confidence data and news from President Trump that the EU and US are ‘quickly establish(ing) meeting dates’ to discuss trade which he said was a ‘positive event’ saw the single currency give up some ground and trade around $1.13 currently. Similarly, sterling rose to just over $1.3580 at the start of yesterday but has dipped to around $1.3480 now. The EURGBP cross is fairly unchanged at around 84p.

The more optimistic (for now) news about trade talks between the US and EU gave equities a boost. US and UK markets were closed on Monday for public holidays and they had room to rebound following losses on Friday when President Trump was threatening 50% tariffs on the EU. In the current environment, a lot can happen over a long weekend and the S&P rose 2% yesterday, taking back most of its losses from all of last week. In bond markets, yields fell with US 10-year yields down 7bps to 4.45% and equivalent UK and German bond yields down a couple of bps each to 4.66% and 2.53% respectively.

Conference board US consumer confidence rebounded in May, up 12.3 to 98, the biggest single month increase in 4 years. Tariff strife and uncertainty, amongst other things, saw the index decline for 5 consecutive months to April and this month’s increase only brings the index back to the level it was at in February. The trade agreement between China and the US appeared to boost confidence and worries about tariffs abated somewhat. The board said the improvement was broad based across all age and income groups with the consumer expectations measure sharply increasing, by the most in a month since 2011, as consumer’s view of the outlook for the economy and the labour market improved. The survey was completed before the increase in tariff tensions (and subsequent easing of) between the US and EU so it’s hard to say what impact this new round of uncertainty will bring to US consumer confidence next month. Separately, the EU Commission measure of economic confidence rose to 94.8 in May from 93.8 in April. This was largely on foot on increase in industrial confidence helped by rising export orders which may be boosted by front running potential tariffs.

ECB chief economist Lane said that “while services inflation is still too high” the task to bring inflation back to target was ‘mostly completed’. He added that there ‘would not be a return to low pre-covid inflation rates’ but the ECB would act if it saw further signs of falling inflation. He also said that tariffs may affect medium term inflation and the ECB also had to consider the impact of exchange rate shifts. He did add that no one at the ECB was ‘considering dramatic cuts’ and, ultimately, he himself did not see the deposit rate being cut lower than 1.5%. The market is fully priced for a 25bps cut in the deposit rate (to 2%) but separately noted ECB hawk, Holzmann was out to say he thinks the ECB should ‘keep their powder dry’ given the EU-US trade situation and pause rate cuts until September.

Looking to the day ahead, economic data due includes German labour market data and ECB inflation expectations. Later tonight we get the FOMC meeting minutes.