The Daily Update - Fed, China National Congress

A combination of broadly stronger US data readings, excitement around the tax-plan and anticipation surrounding the Fed Chair position saw US Treasury yields track higher last week; the yield on the 10-year benchmark was up 4bps to 2.41%. The DXY (dollar) Index rallied 1.22% over the week, fuelled by the passing of a budget resolution on tax reform. In terms of US data, the Chicago Fed National Activity Index surprised to the upside, as did the preliminary durable goods print for September; which incidentally drove 10-year yields higher. The initial Q3’17 GDP estimate was at 3%, marginally lower than Q2’17.

Later today personal income, personal spending and the Fed’s favoured PCE readings will grab market attention. PMI and ISM follow on Wednesday, followed by the FOMC meeting, where the rate decision will be announced on Thursday. All eyes will turn to October’s employment prints, which will be an interesting set of data, following the weak hurricane-affected September readings; market expectations are for +312k jobs, unemployment unchanged at 4.2% and a dip in hourly earnings on a mom and yoy basis. Away from economic data, this week we expect to hear more on the tax-overhaul, and budget debate. Also, Trump may select the Fed chair (effective next year), ahead of his Asia trip which commences on Friday; Politico reports suggest it will be between Fed Governor Jerome Powell and Stanford University economist John Taylor. The former is expected to continue on the current policy path, while a hawkish Taylor believes rates are too low.

Elsewhere, China’s 19th National Communist Party Congress came to a close on Wednesday, officially marking the beginning of President Xi Jinping’s second term as party general secretary (and points towards a likely third!). Xi furthered Deng Xiaoping’s reforms and ideology of the 1980s surrounding his “theory on socialism with Chinese characteristics”. How exactly “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” will look, only time will tell. But, further to Xi securing more influence for himself, there was the unavoidable rhetoric for the pursuit of “more balanced economic growth”. The idea of more balanced growth across demographics and regions is an important one. It signals that Xi now feels more able to confront the established and privileged elite and that the nation must now strive beyond “prosperity for some so as to achieve prosperity for all”. The ebbing crackdown on corruption should continue and special attention towards western and central Chinese states should help address these long marginalised provinces.

The renminbi weakened marginally over the week; on the back of a strong dollar. There was not much in the way of key economic data prints for China last week; industrial profits gained year-on year in September. Tomorrow we see the official PMI releases with the Caixin manufacturing reading later in the week.

Elsewhere, the ECB left rates unchanged, and announced that it will reduce its monthly asset buying programme by half, to EUR 30bn, from January 2018. Following the announcement, ECB President Draghi said the decision ‘reflects growing confidence in the gradual convergence of inflation rates towards our inflation aim on account of the increasingly robust and broad-based economic expansion’. He did however add that ‘domestic price pressures are still muted overall’. The benchmark ten year German Bund rallied off the back of the announcement and the euro took a nosedive, falling 1.5% against the US dollar over the week; playing right into Draghi’s hands. The actual Q3’17 GDP reading and unemployment figure will be released on Tuesday. We also have the Bank of England meeting on Thursday with a 25bp rise in rates widely expected.

On the the new issue front, China’s first USD denominated offering, in over 13 years, was a roaring success. Over 11 times oversubscribed, the USD2bn two tranche deal, issued out of Hong Kong unfortunately left very little on the table; the 5-year tranche priced at only 15bps above USTs, while the 10-year was issued at just 25bps over. We calculate that both deals were expensive on a relative value basis, thus we did not add to our portfolios. The bonds are also not rated by the three major rating agencies, although they have rated China A1/A+; so an implicit rating can be used to price the bonds; which we have calculated as ~3 and ~3.75 notches expensive, respectively.

We did, however, add the a 30-year (amortising) bond from state-owned Abu Dhabi Crude Oil Pipeline (ADCOP). Rated AA, the bond was issued at a yield of 4.6%, using our proprietary Relative Value Model, we calculated that the bond is over 6 notches cheap. This deal was particularly interesting as we think the long-end of the Abu Dhabi Government curve is attractive in its own right. We calculate the Abu Dhabi Government 4.125% 2047’s yield is close to 4.2% and is trading over 4 credit notches cheap. As regular readers are aware, we feel quasi-sovereign issues from creditor nations remain compelling investments.