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EU leaders meet in Salzburg, US-China Trade War continues


Last week was another round of push and pull between the US and China on trade tariffs. After Trump stated it would impose a 10% tariff on $200bn worth of goods on China, China retaliated with a $60bn tariff of their own on the US. This is effective September 24th.

On the data front, US initial jobless claims fell to 201K for the week ending September 14, the lowest since November 1969 and better than the 210K expected. The Philly Fed Manufacturing Index for September jumped to 22.9, almost doubling August 11.9 and well above the 17.0 expected. Existing Home Sales were flat in August vs. an expected increase of 0.3%.

US housing starts rose in August more than markets has expected which was boosted by a jump in multifamily construction. This is a positive sign for the housing market which has underperformed the broader economy amid rising interest rates for home loans. Housing starts rose 9.2 percent to a seasonally adjusted annual rate of 1.282 million units in August, the Commerce Department said on Wednesday. Analysts polled by Reuters had expected an annual rate of 1.235 million units. Meanwhile, the number Privately-owned housing units authorized by building permits in August fell 5.7 percent to a rate of 1.229 million units.

The Canadian Dollar rallied to a 3-week high against the greenback last week as markets grew optimistic that a new deal to renew the NAFTA trade pact would be reached before the deadline of October 1. The Loonie was also aided by the continuation of recent strength in the price of oil as crude futures finished higher due to supply uncertainty out of Iran.

On the data front, month-on-month CPI printed at 2.8% in line with expectations. Also, retail sales figures were posted and showed signs of life publishing a 0.3% above the previous reading of -0.2% but below estimates of 0.6%. Further loonie direction will come from the ongoing NAFTA negotiations.

Last week saw the ECB reaffirm their plans to reduce asset purchasing programmes to €15 billion per month in the last quarter of the year, finalising the unprecedented programme by the end of the year. There was also good news out of Italy, as a report, apparently from Italian Finance minister Giovanni Tria, outlined the deficit from the upcoming budget will be around 1.6%, below the ECB’s ceiling of 2%. This has seen a mini rally in Italian bonds and it may seem that for the time being at least the risks out of Italy are off the table.

On the data front, the monthly set of PMIs from the Eurozone printed with a further slowdown in France and a mixed picture in Germany and the Eurozone as a whole. Expansion has moderated considerably over the past 8/9 months however the economy has seen three years of solid growth to the point the ECB seems likely to hike rates in Q2 2019. Further EUR gains will be seen if the FOMC echoes market sentiments next week that we could see an economic slowdown in America over the next couple of years.

The pound was off to a good start last week, with the opening sessions rallying around 0.70% to levels not witnessed since the start of August. The main catalyst for the move was on the back of hopes that there was progress being made in the Irish border Brexit question. The Times newspaper reported yesterday that the EU was prepared to accept a frictionless Irish border post Brexit which increases the probability of a withdrawal agreement deal by the end of the year.

Meanwhile, on the data front, house prices rose by 0.7% in September, after falling by 2.3% in August, according to Rightmove. The annual pace of house price growth edged up to 1.2% in September, from 1.1% in August.

Last week also saw the official start of an EU leaders meeting in Salzburg with pound-bulls hoping face to face talks between Theresa May and her European peers will pave the way for a trade deal later in the year. For now, the EU leaders have failed to come to an agreement over the UK's future relationship with the EU post-Brexit and UK Prime Minister ay's EU colleagues have rejected the so-called “Chequers Plan” and have advised she needs to give further ground in an effort to break the deadlock. The PM now has to go to her party conference at the end of September with a no deal scenario looming and calls for her head growing from pro-Brexit members of her party.

Last week was relatively lackluster with the Australian Dollar with the RBA delivering the standard neutral statement it has for over two years earlier in the week. The drivers of the recovery continue to come from off-shore forces. Besides the softening Greenback, the Aussie also found support from rallying commodity markets. The CRB Index, a basket of 19 commodities, rose significantly to challenge 193.65, a healthy gain from its June low of 164.54.

Chinese headlines also assisted the Australian Dollar in their recovery with President Xi stating that China would reduce tariffs on goods from most of its major trading partners. The average tariff rate could be significantly reduced as early as next month, potentially assisting Aussie exporters access one of the world’s largest markets a little easier.

To close the week, the Aussie enjoyed another quiet session on the economic calendar with momentum will come from off-shore sources.

The New Zealand Dollar was squarely focused on last week on the all-important quarterly GDP release. The kiwi got an early lift during with week after Prime Minister Jacinda Ardern mistakenly said she was "pretty pleased" with gross domestic product growth having received a "hint" ahead of the official release of the second-quarter economic data.

In the end, the release was upbeat, with year-over-year GDP coming in at 2.8%, up from economists’ forecasts of 2.5% and the prior 2.7%. The quarterly growth measure similarly exceeded expectations, at 1.0%, compared to the estimate of 0.8% and the previous 0.5%.

Elsewhere on the data front, Global Dairy Trade (GDT) which fell 0.7% in the previous auction, declined 1.3% and we also saw the release of Westpac Consumer Sentiment survey, which showed confidence among New Zealand households has seen a significant drop. The Westpac-McDermott Miller Consumer Confidence Index fell by 5.1 points to 103.5 in the September quarter, its lowest level in six years.