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RBA, Trade war and Brexit


Canada’s labour market surprised to the upside again in January, with the economy creating far more jobs than expected at the start of the year despite uncertainty about the direction of oil prices and concerns over slowing global growth. The country added 67k jobs last month, 5k more than forecast.

Global equities and stocks eased back last Friday as Trump ruled out a meeting with President Xi before the original March 1st deadline, which marks the end of a 90-day truce between the two nations, after which tariffs on about $200bn worth of Chinese exports to the US will increase from 10% to 25%.

Trump's stopgap deal to keep the US government open expires this Friday, 15 February, with border wall funding again threatening another shutdown episode. Talks broke down late on Saturday night and Republicans and Democrats are not communicating for now, imperilling the prospects for a deal by the end of the week.

German exports rose more than forecasted in December, a rare positive surprise contrasting negative growth indicators. This was followed by French Industrial output picking up in December by 0.8%, helped by a partial recovery in refining activity. Upward surprises to productivity indicators from the Eurozone’s leading economies should eventually lead to the ECB exploring the opportunity of raising the interest rate from its historic low level. A no-change in rate scenario is still the most probable for this year at 48.5%.

Britain and Japan have made little progress on a new trade deal in the past 18 months, according to officials involved in the talks, with tariffs set to revert World Trade Organisations levels at the end of March unless the UK ratifies a Brexit Deal. At the same time, a secret group at the heart of the UK government is drawing up plans to kick-start the British economy in the event of a no-deal. The plan is being dubbed ‘Project After’.

The implied probability of a No-Deal Brexit has increased to 33.3% from a low of 11%, which is the highest since early December last year. The lack of progress in negotiations is being blamed for the increased probability of the UK crashing out of the EU without a deal.

Australia’s central bank became the latest to open the door to cutting interest rates, sending the AUD 1.4% lower, its steepest end of day correction in over 6 months. RBA governor Philip Lowe hinted that the bias for the next move in its key interest rate is now “neutral” (the RBA had, until know, always said the next move was going to be up), citing global risks.

The Australian Royal Commission into Banking Misconduct was released much to the relief of banking stocks as it was “better than expected” with a low surprise set of recommendations that had already been well flagged by the hearings, interim report and past press releases. Financial stocks recorded their best daily performance on the share market in nearly a decade.

The Kiwi Overnight Indexed Swap (OIS) is telling that the market sees a cut by the RBNZ this year now at 91%, up from 50% last week. NZ 2-year yields fell more than 12 basis points last week to fresh record lows. NZD/USD fell from a high of 0.6906 last Wednesday to a low of 0.6730 on Friday.