The geopolitical factors are again in the foreground: America's withdrawal from the "nuclear deal" with Iran under pretexts was expected with certain fears but the markets met this news with surprising calm. Stock markets in the US and Europe are trading in the green zone, the growth of yields on government bonds resumed, and only oil rushed up, as markets can't ignore the threat of war in the Persian Gulf.
The report on US consumer inflation for the month of April will be published today. Forecasts are contradictory. The slowdown in the growth rate of the average wage creates a threat to consumer demand. GDP growth in the 1st quarter slowed to 2.3%, and in the first place, the slowdown was due to a drop in consumer spending. Published on Wednesday, data on production prices turned out to be worse than forecast. The growth in April was 2.6% against 3.0% in March while the mortgage lending index again decreased.
It would seem that the trend is negative, and it should have affected inflation expectations. However, the most accurate indicator, the yield of 5-year inflation-protected bonds Tips, has reached 2.1% as of May 8, and this is the best result for more than 5 years.
Thus, the report on inflation, according to the market, will show the growth of consumer prices, which means that the chances of a more aggressive rate increase this year will grow. This is one of the most important bullish factors for the dollar.
In the current year, the Fed intends to reduce its investments in government bonds by $ 228 billion, while the sale of government securities and by foreign investors is continuing. The increase in yields, in turn, will provoke an increase in the government's interest payments. This is a serious threat in the conditions of a rapidly growing deficit of the federal budget. It is necessary to return to the market buyers' treasuries, and this is exactly what Trump is doing, masking his actions with tariff wars and other. At first glance, these are inadequate steps.
Next week, a new stage of negotiations with China will begin. Vice Premier Liu He will leave for the United States. On one hand, this is a positive news, because as long as negotiations continue, there is a chance for an end result that suits both sides. However, there are also negative factors. The entire package of demands from the US is so severe that China is unlikely to agree to satisfy it in full.
In particular, the US requires China to abandon the "Strategy 2025", which is focused on the growth of technology and the transition to an innovative economy. Such a demand is unacceptable for China but the US is acting harshly, already significantly restricting China's investment in the US, and moreover, the action plan is fully developed and implemented.
The procedure for trade restrictions for the first $50 billion in full swing. On May 11, public comments will be made before the hearings. Public hearings in the Congress will be held on May 15, 22, and probably more in late May and in early June. Mnuchin intends to announce new investment restrictions for China on 100 billion dollars. What is China doing in this situation?
Reducing the trade balance deficit to $200 billion is also completely unrealistic, even though China is ready to partially meet the requirements. And if so, then the escalation is inevitable. Apparently, this is Trump's strategy: to put forward unrealizable and stringent requirements, the refusal of which is then changed to the promise of buying treasuries. China is not given the opportunity to invest in the most interesting investment projects in the US, and are forced to buy low-yielding securities.
The way out of the nuclear deal with Iran is exactly the same tool aimed, first of all, at Europe. It will give Trump the opportunity to exert pressure on the companies of Germany, France, and China working with Iran, using the same arguments: the abolition of sanctions in exchange for financing the American economy.
The dollar, in current conditions, can't become cheaper, since the whole strategy is aimed at increasing demand for the American currency. How will such a strategy be successful will be shown in the near future.
