The Daily Update - OUCH, Argentina, ZEW and Boris the clock stopper

As the dust settles after the rout in Argentina debt markets it appears some of the largest Emerging Market funds took the brunt of the collapse with returns dropping up to 3.5% on the day. This leaves many with a less than 1% return for the year to date. The question now; are they a buy at this juncture, we think not. The outlook for a US recession is increasing in probability and if that is an occurrence over the coming twelve to eighteen months the last place we think you want to be is in lower-rated assets as the spread widening that may occur could be punishing, hence our stance in longer maturity higher-rated assets.

Yesterday was all about economic data as US CPI came in a little higher than expectations and the German ZEW index came in at disastrous levels.

On the US CPI both overall and ex-food and energy indices came in up 0.3% with firmness broad-based although there is thought to be some impact from the tariffs in the data. The headline rate moved up from 1.6% to 1.8% YoY and the core rate up to 2.2% from 2.1%. Energy prices were strong as gasoline jumped by 2.5% but there was also surprising strength in used car pricing, apparel and medical care. We continue to monitor the data as our long-duration positioning is reliant on a relatively low inflationary outlook.

So to the German ZEW report…..Ouch. The current situation index came in at -13.5 from the -6.3 expected, bad enough but the expectations index which was expected at a lowly -28 came in at -44.1 from the prior months reading of -24.5. Now call us old fashioned if you want, but does Germany really need a hard Brexit, on top of the very obvious weakness in the manufacturing sector, we think not. Could be Boris’s timing is spot on.

The Daily Update - US inflation and UK inflation baskets

It’s US consumer price inflation day again, and it seems forecasts were dead on, with the Core CPI up 1.8% YoY. This made for a relatively muted market reaction with 10-year US Treasury yields first falling 3 basis points but then returning to 2.86%. At around the same time President Trump tweeted CIA Director Mike Pompeo is to become his new Secretary of State, finally unseating a discordant Rex Tillerson; the White House confirmed Gina Haspel as nominee to replace Pompeo as CIA Director; and the expectation is that a replacement for Gary Cohn may also be announced imminently. Earlier Trump forenamed CNBC’s Larry Kudlow as having ‘a very good chance’ at becoming the new director of the White House National Economic Council.

The Daily Update - US inflation

The ‘eagerly’ awaited US inflation and retail sales data came out earlier today. An upside shock in these could have further uneased the both bond and equity markets, still teetering in the ‘fear zone’ with the VIX remaining above the 20 level. Whilst a tempered or only slightly stronger-than-expected reading would be enough to convince markets that the Federal Reserve would move ahead with tightening monetary policy at a faster pace than 2017, but without encouraging an inflation scare. US Treasuries ahead of the data release held steady with the 10-years trading around yields of 2.82% and the 30-years around 3.11% both ~7bp off their recent highs.

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