Risk on as Trade War Fears Ease

Xi Opens Up, Boosts Risk Assets

Earlier today Chinese President Xi Jinping spoke at the Boao Fourm for Asia (similar in nature to Davos), where he portrayed a market-friendly approach which included a recommendation for a “new phase of opening up”.  In the speech, Xi warned against a return to the “Cold War mentality” as he weighed in on the recent tit-for-tat nature of tariff threats between the US and China.  While there was little reference to any specific policy, Xi spoke to many of the central issues in the US – China trade conflict, including the protection of intellectual property, increasing of Chinese imports, and changes to the limits on foreign ownership within Chinese manufacturing.  The speech was received positively by financial markets, striking an open and conciliatory tone and providing a mild reprieve from the continued trade war rhetoric.

Major US stock indices posted gains on the optimism that anxiety of a pending trade war may in fact be exaggerated, given Xi’s conciliatory tone.  The Nasdaq led the way with a 2.07% gain, while the S&P 500 and DJIA posted more modest gains of of 1.67% and 1.79% respectively.  US Treasurys sold off throughout the trading session, as yields/swap rates increased 1-2bps across the curve, bringing the 10-year note yield close to 2.80% as of the close.  The US Dollar fell on this news against both the Euro (EUR) and the Pound (GBP), down 0.3% and 0.4% respectively.  Crude Oil Futures rallied on this news, rising to $65.77 up 3.7%.

Price Pressures Continue to Build

Key economic data on the day included the Labor Department’s producer price index for March, which reflected steady inflationary growth in the prices received by domestic producers.  The 0.3% monthly increase beat market expectations of +0.1 and exceeded the prior month’s +0.2%.  Much of the rise was attributed to increasing costs of food, where prices surged 2.2% during March – the fastest monthly acceleration in nearly four years. Price growth in the service sector was also robust, climbing 2.9% compared to a year earlier. The core PPI also exceeded median forecasts, reported at +0.4% MoM.  Looking at producers’ inflation over the past year, overall producer prices have increased 3.0% while core prices have risen 2.9%.

 

Financial markets will receive their next dose of inflation data tomorrow morning via the Labor Department’s monthly consumer price index, where median forecasts indicate no change in headline CPI and a 0.2% rise in core CPI for March.