Later this week Xi Jinping, the Chinese President, will visit France and Italy amid growing fears within the EU of China’s influence over the region, with the EU also believing there remains a lack of reciprocal market access. The EU would like to see greater access for European companies, fewer subsidies for Chinese companies (from China), and probably the most important of all, curtailment of technology transfer from European firms to their state-owned joint venture partners in China.
The summit between President Trump and Xi has been pushed back while trade negotiations continue but Trump said the negotiations are ‘going incredibly well’ while China’s state news agency pointed to ‘substantive progress’: the market is still expecting a deal to resolve the impasse. However, the US hard-line approach to trade and tariffs looks likely to continue with the US likely turning their attention to other trading partners.
Earlier this week the EU announced it was holding back the next phase of Greece’s debt relief as the government had so far failed to fully implement reforms that it had promised during the huge bailout that ended in August last year. As part of the debt relief scheme, Greece was due to receive approximately EUR1bn, however, according to the EU, the Greek government has so far not completed new housing insolvency rules for those threatened families with foreclosure on their homes.
It was an impressive performance from US dollar bonds yesterday as $24bln in 10 year UST supply was easily swallowed up by a bond hungry market. The tame US CPI print certainly didn’t hurt but there does seem to be a new wave of buyers emerging who have given up waiting for a move back to the top of the current trading range of 2.6% to 2.82% in 10 year yields. Indeed duration buyers were seen in the long dates as some frustrated investors are thought to have bitten the bullet and need to get some maturity risk on board ahead of next week’s FOMC meeting.
US core inflation data came in today up just 0.1% month-on-month, further relieving any fears of immediate runaway inflation; the year-on-year core figure came in at 2.1% (0.1% below expectations and the previous month’s reading) while real average hourly earnings were up 1.9% yoy. For all those lucky accountants the category with the highest inflation was “tax preparation” where data showed a price surge of 13.8%. Still, the broader impact on the average household purse may be larger than the figure suggests as food prices were up sharply and gas prices rose for the first time in four months.
Don't expect to see more interest rate hikes from the Federal Reserve anytime soon, Fed Chairman Jerome Powell suggested to ‘60 Minutes’ in an interview that aired Sunday night on CBS. Powell, the frequent target of criticism by Trump, also added he can't be fired by the leader of the free world and that he intends to serve out his full four-year term. Powell believes ‘Inflation is muted and our policy rate we think is in an appropriate place’ adding ‘Patient means that we don’t feel any hurry to change our interest rate policy’ saying the current rate is roughly neutral. He went on to say ‘We’ve seen a bit of slowing, but still to healthy levels in the U.S. economy this year’ however believes ‘there’s no reason why this economy cannot continue to expand’.
Amid slowing global growth and looming recession concerns, the ECB yesterday got in line behind the US Fed and Bank of England, in effectively freezing interest rates. Appearing more dovish-that-expected, the central bank announced that interest rates will be kept at current historical levels (0% core and -0.4% deposit) for the remainder of 2019. Eurozone growth forecasts were also dramatically sliced to 1.1%, from 1.7% for 2019. ECB President, Mario Draghi stated that Q4’18 growth within the region had fallen to 0.2%; half that achieved in the first two quarters of 2018. US-China trade wars and uncertainties over the Brexit outcome were highlighted as two key drags on eurozone growth.
Greater index inclusion continues to build investor interest in and attract flows into the GCC markets: For example, JP Morgan is including Bahrain, Kuwait, Qatar, Saudi Arabia and UAE to its Global Diversified Emerging Market Bond Index (EMBI-GD) in phases from January 31 2019. With this in mind, it came as little surprise that after solid performance YTD and a general tightening in spreads across much of the region Qatar returned to the primary market with a 3 tranche 5Y/10Y/30Y USD10bn issue.
The Organisation for Economic Co-operation and Development (OECD) again cut its outlook for global economic growth: downgrading its 2019 forecast to just 3.3%. Given that the OECD last year made a series of downgrades to their global economic outlook and the continued challenges of protectionism frustrating their namesake goals, perhaps The Organisation for Economic Continued Disappointment is a more representative name to fit the acronym.
The services sector in China expanded at the slowest pace in four months in February, suggesting slowing growth in demand across the services industry, although the reading was largely in-line with those of an official gauge of the non-manufacturing sector released last week. The Caixin/Markit services purchasing managers' index (PMI) fell to 51.1, the lowest since October and down sharply from January's 53.6. The Chinese government is hoping a stronger services sector will cushion a slowdown in its huge manufacturing industry that is being hit by not only the U.S.-China trade war but also rising labour costs.
Over the weekend Federal Reserve Chairman Jerome Powell was again on the receiving end of Trump's tongue as he told a Conservative Political Action Conference that Powell was someone who ‘likes raising interest rates’. Trump has long believed the Fed are out of touch, even going so far as to say ‘The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch - he can’t putt!’
Brent crude is currently trading ~23% higher ytd. So it came as little surprise that Donald Trump was sufficiently vexed to tweet on Monday: ‘Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike - fragile!’ Brent crude traded off 3.5% although recovered somewhat on Tuesday with the API report showing US crude inventories declined.
Moreover, subsequent comments from Khalid al-Falih, Saudi Arabia’s Energy Minister, on Wednesday suggested continued supply side discipline following OPEC+’s December decision to cut production by 1.2m bpd from January.
The summit in Hanoi was over even before the planned lunch and joint signing; and all the vague optimism of last year’s summit evaporated as Trump “had to walk”, with Kim wanting nothing short of the US dropping all sanctions without having to give up their nuclear weapons. The failure to even appear to be on the same page goes to prove that recent vague optimism in (various) negotiations is little indication of the chances of an actual deal.
For some time, Aramco has openly been looking to tap the flourishing global natural gas business and 2019 may be the year we see the world's biggest oil exporter make sizable investments tying it with the fast expanding gas industries in the US, Russia and perhaps Australia. Yesterday their CEO Amin Nasser announced aspirations to boost production from 14 billion to 23 billion cubic feet of gas per day by 2030, investing as much as $150 billion in domestic projects and foreign acquisitions in what they see as a “very lucrative” opportunity.
Warren Buffett, the man with the midas touch, has said he would support Michael Bloomberg if he decided to run for president next year. In an interview with CNBC, Buffett stated that he thought Bloomberg would make ‘a very good president’. Buffet, who endorsed Democratic candidate Hillary Clinton back in 2016, has been a critic of Trump for a long time. ‘If Mike Bloomberg announced tomorrow that he was a candidate, I would say I'm for him," Buffett said. "I think that he knows how to run things. I think he's got the right goals for America.
Yesterday Donald Trump announced that due to the ongoing talks with China over the recent trade tensions making ‘substantial progress’, he will be delaying the planned rise in tariffs later this week. As usual the leader of the free world behaved like a teenager by posting his announcement first and foremost on social media (I wonder if he’s allowed his phone at the dinner table?) In two China-related tweets he said ‘I am pleased to report that the U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues.
Russia’s 2018 GDP growth surprised on the upside registering 2.3% growth when market expectations had been for 1.8% growth and the central bank had been forecasting 1.5-2% growth. Notably, for 2018 Rosstat revised up the contribution from construction in the first 11 months of the year with the Yamal LNG project a factor. Other potential factors boosting 2018 growth include the world cup, some increased oil production as the OPEC cuts were eased and the ramp up of Yamal LNG. Importantly, the Economy Ministry stated the figure is seen as reflecting one-off factors rather than a sustainable increase and is forecasting growth of 1.3% for 2019.
Many readers will know that our outlook favours a period of pause in the actions of the Fed and the funds rate while utilising the balance sheet to add or withdraw liquidity. We also have an equal chance of a further hike or indeed a cut dependent on how economic data unfolds. This morning following on from the release of the Fed minutes from their 30th January meeting we see that the market pricing for a hike this year has now fallen to just 3.6% and a cut has now moved up to a 6.7% chance, also now very balanced.
With the FOMC minutes out later today and another round of trade talks just beginning, greater clarity in these two dynamic policy realms continues to be a key driver of markets, particularly as both US and Chinese economies face growth headwinds. Markets will be closely parsing Fed policymakers’ outlook, but already expect rates to remain unchanged through 2019 with implied probabilities at 72% with a 22.4% expectation of a quarter percentage point rate cut by the end of January 2020.
A very quiet start to the week as we enter UK school holidays and the US wakes up after their long Presidents Day weekend.
However, Bloomberg editorial team have put out a great piece looking at the ‘scandal’ that is the use of the Retail Price Index (RPI) for rail fare increases and items such as student loans while using the Consumer Price Index (CPI) for welfare, pensions and so on.