The Weekly Update

Broadly weaker data globally saw the markets err on the side of caution last week. World PMI and ISM figures sent shockwaves across markets last week; the US ISM manufacturing reading fell to a decade low (further into contraction territory), while the non-manufacturing print markedly missed market expectations falling to a three-year low. Following the latter reading, US Treasury yields rallied and currency markets witnessed knee-jerk dollar selling. Clearly Trump’s trade war is also having a negative effect on the US economic growth outlook. The 10-year benchmark eventually closed the week 15bps lower, at 1.53%, and the dollar fell 0.3%, measured by the DXY Index. Oil prices also plummeted on the assumption that global demand is expected to fall; Brent closed the week at $58.37pb, 5.72% lower.

All eyes turned to Friday’s mixed US employment prints, unemployment fell to 3.5% while non-farm payroll missed expectations (but was revised higher for previous two months). The key figure however missed expectations, with average hourly earnings falling to 2.9% in September, from 3.2% previously. Fed comments last week backed up the market sentiment with the likes of Kaplan saying the two recent rate cuts have helped “reduce the likelihood of a very severe slowdown but doesn’t eliminate it” adding that he would prefer to cut “sooner rather than later.'' Meanwhile, in an attempt to manage market expectations, Fed Chair Powell opined: “While not everyone fully shares economic opportunities and the economy faces some risks, overall it is— as I like to say — in a good place,”, however, noted “the U.S. economy, like other advanced economies around the world, is facing some longer-term challenges,”. Markets will no doubt closely follow Powell’s speech at the NABE annual conference which concludes on Tuesday. The current implied probability of a rate hike at the FOMC meeting at the end of October stood at ~73%; a drastic move from the ~43% priced a week earlier.

Across the pond, euro area economic figures disappointed; particularly inflation readings. Meanwhile, Brexit negotiations appear to be headed in no direction following PM Johnson’s proposal; which the EU have said must be revised and resubmitted this week. Over the weekend, Johnson said he is willing to pack his bags and leave the EU, deal or no-deal come October 31, adding that he will seek a Supreme Court ruling for a no-deal Brexit if nothing else is negotiated before Halloween. This comment will no doubt keep market makers on the edge of their seats this week.

With China closed for Golden Week, there was not much to report, however, any trade rhetoric will be monitored very closely following comments that China is becoming less tolerant and are thus tapering scope for negotiation with the US, particularly around China’s industrial production and government subsidies. Planned talks on October 10 will, therefore, be key to market sentiment this week, especially ahead of the upcoming US trade tariffs on Chinese imports. The offshore renminbi gained 0.36% against the dollar (spot basis) last week. Staying with Asia, over the weekend, the US-North Korea meeting in Stockholm was a non-starter, with Kim Jong Un hinting that he will ramp up nuclear threats if the US doesn’t ease its sanctions by year-end. North Korea’s chief negotiator Kim Myong Gil was quoted saying: “If the U.S. is not well prepared, who knows what terrible incident could happen. Let’s wait and see.”

Looking ahead, we heard that the US will continue its overnight repo activity this week, with reports suggesting this could continue into November. Following Germany’s disappointing factory orders prints earlier this morning, the industrial production reading on Wednesday will be watched closely. September US PPI and CPI prints are due on Tuesday and Wednesday, and are expected to come in marginally unchanged from August levels. The only other data reading of interest will be China’s Caixin PMI also on Wednesday. Fed and BoE rhetoric will attract market attention on Tuesday as will the FOMC minutes on Wednesday. A relatively quiet end to the week will see Indian PM Modi and China’s Jinping meet at an unofficial summit on Friday and the conclusion to the Nobel Prize Awards.

The Weekly Update

The Weekly Update

Another busy week for markets saw the US House of Representatives launch an impeachment inquiry against US president Trump and UK PM Boris Johnson’s Parliament shutdown deemed unlawful. The 10-year US Treasury closed 4bps lower last week, at 1.68% and the DXY rallied 0.60%, hitting year highs on Thursday. Meanwhile, sterling’s rollercoaster ended the week 1.49% lower against the greenback.

While Saudi Arabia raced to restore full oil production, the US ramped up its defence capabilities in the Kingdom as US-Saudi-Iran tensions rose;

The Weekly Update

The Weekly Update

The Fed “hawkishly” cut rates last week by 25bps, to 1.75%-2.0%, although a ¼% cut was largely priced in, it seems the market was left slightly disappointed, as looser monetary policy indications were also expected. As a result US Treasury yields drifted lower, with the benchmark 10-year down 18bps, at 1.72%. Meanwhile the DXY Index edged 0.26% higher. Also of interest was the Fed’s money market cash injections through the week, the first in a decade, as short-term rates spiked as high as 10% as a result of tighter liquidity. Such repo operations were commonplace ahead of the financial crisis but since stopped once the Fed widened its balance sheet and target rate bands; used to manage liquidity. With few signs from the Fed of the revival of QE, the Fed may look to conduct more frequent repo operations, some reports claim this could continue until October,10; the long-term effectiveness of this operation, however, is yet to be decided.

The Weekly Update

The Weekly Update

Markets broadly began the week on a risk-on tone, which saw Treasuries sell-off; the benchmark 10-year yields were up over 33bps over the week. During this time the US dollar index (DXY) fell 0.14% while the offshore renminbi rallied 0.85% against the greenback.

The eagerly awaited ECB announcement last week appeared to pacify most market makers. Draghi announced an ECB cut in the deposit facility rates from -0.4% to -0.5% and €20 billion per month of open-ended QE. Importantly, the ECB will also introduce a two-tier system for reserve remuneration which will cushion the blow on the profitability of Europe’s major banks, as further negative rates bite.

Ahead of the meeting Germany’s announcement of a “shadow budget” caused some concern. As the country is on the brink of a recession the proposed “shadow budget” would allow the new debt to be issued by public investment agencies to fund infrastructure and climate protection projects, without the federal budget being affected. 

The Weekly Update

The Weekly Update

US 10-year Treasuries gave back 6 basis points last week, following the 52 basis point rally in August, as equity markets rose on modest consumer data, talk of concessions in Hong Kong and further materialisation of central bank policy easing expectations. The S&P 500 was up 1.8% despite the week starting with the introduction of new consumer-focused tariffs from both the US and China. And although the US managed to maintain a marginally positive PMI reading (with now 75% of developed nations’ latest readings under 50) the latest US ISM undershot significantly, at 49.1, signalling further weakness in the cycle.

The Weekly Update

The Weekly Update

Last week’s mix of political disruptions and further weak data helped push US 10-year Treasury yields down 4 basis points to close out the week back below 1.5%. This marks the fifth consecutive week of Treasury and broader high-grade bond gains, with 14 of the last 17 weeks marking falling Treasury yields. Last week however equities were also up, with the S&P 500 posting a 2.8% rally after poor performance in all the earlier weeks of August.

The Weekly Update

The Weekly Update

Another rollercoaster week ended with the S&P 500 down -1% and long-dated Treasury yields pushing all-time lows of below 2%. The Dow Jones Industrial Average fell more than -3% on Wednesday alone (which nowadays can be exaggerated as the fourth ever >800 point fall) but retraced half of this loss by weekend to close down -1.5%. Earlier in the week, positive news that Trump had delayed some of his proposed China tariffs until mid-December supported markets for less than a day.

The Weekly Update

The Weekly Update

Equity markets remained depressed last week but muted in comparison to the sharp sell-off from the prior week. The S&P 500 fell half a percent on the week as US 10-year Treasury yields fell a further 10 basis points, closing the week at just 1.75% with similar Bund yields falling a further 8 basis points to -0.58%; meanwhile, the Japanese yen strengthened a further point to 105.7 versus the dollar. Numerous growing trade tensions and political upsets helped feed ongoing risk-off sentiments. However, markets gained some composure towards the end of the week, paring losses and preventing a repeat of the previous week.

The Weekly Update

The Weekly Update

The Fed cut rates for the first time in a decade although there were two dissenters; they also announced they will stop their balance sheet runoff two months ahead of schedule now in August. However, there were conflicting messages in the press conference where Chairman Powell described the cut as a “mid-term policy correction” and intended to “insure against downside risks from weak growth and trade uncertainties” only then to comment that he was concerned for the risks to global growth, manufacturing and below-target inflation. This caused a stormy session for bond yields and the stock market.

The Weekly Update

The Weekly Update

Central Banks were and are firmly in focus, with important policy speeches from the ECB last week and an expected rate cut from the FOMC in the week ahead; in addition to forthcoming rate decisions from the Bank of Japan and the Bank of England. We’re also in the middle of a fortnight of PMI releases which began last week with a number of downside surprises, notably in Germany, and a downward revision to global growth, raising concerns that a similar narrative will play out across the US and China in the week ahead; also ahead are a range of inflation data, the much-watched non-farm payrolls and resumed trade talks in Shanghai.

The Weekly Update

The Weekly Update

After holding above the 3,000 level from the previous Friday until last Tuesday, the S&P 500 sold-off towards the end of the week to close at 2,976, down 1.23%. US Treasury 10-year yields trimmed 7 basis points, pulling-back to just 2.05% following further threats from Trump of a $325 billion hike on Chinese import tariffs and somewhat weak corporate earnings throughout the week - notably a number of major technology stocks, large banks and energy companies. Global growth concerns also rose to the forefront again after China posited its weakest rate of growth in 27 years; the second-quarter GDP figures showed the economy slowed to 6.2% from a year ago.

The Weekly Update

The Weekly Update

There were modest gains in equities last week with the S&P 500 gaining 0.8%, but this small gain signalled not only new highs but closed the week above 3,000 for the first time. With the backdrop centred around trade tensions affecting the global economy and central bank watching, market moves this week encapsulated the recent upside surprise in US employment data from previous week as well as last week’s comments from Fed Chair, Jerome Powell, in-light of this stronger than expected data. Treasuries lost some ground, with 10-year yields gaining 9 basis points over the week to close at 2.12%.

The Weekly Update

After eight straight weeks of Treasury yields falling from over 2.5% to 2% we saw some very slight pull-back last week as 10-year yields rose 3 basis points to close out the week at 2.03%. Correspondingly equity valuations were boosted on a mix of good data with the S&P 500 pushing new highs and closing the week up 1.65% at 2,990, just 0.3% below 3k.

The meek pick-up in markets has continued in the wake of the fragile trade truce between the US and China agreed at the G20 last week, with this optimism then boosted by a week of upside surprises in PMI, ISM and non-farm payroll data with the last of these coming in at 224k versus estimates of 160k. Taken together with the other resilient indicators, the stronger payroll headline should dispel the calls for a 50bp ease at the end of July meeting, but 25bp is still likely given the Fed does not meet in August. After July the next meeting is September 18th so we have two more NFPs by then. Of course, trade frictions and the President’s involvement could have a massive impact in the meantime.

Over in Europe, the data painted a broadly weaker picture with a -2.2% slump in Germany factory orders, far worse than the predicted -0.2%. At least the markets seemed to welcome the proposals for the next European Central Bank Chair, Christine Lagarde, and European Commission President, Ursula von der Leyen. Lagarde is seen as a tame and tolerable choice who symbolises a likely continuation of Draghi’s accommodative policies but also signals the further trend of central bank politicisation as – like Jerome Powell  - she is not your usual hardened economist.

Forthcoming economic data includes Japan machinery orders and balance of payment data in addition to Germany trade and industrial production on Monday; this is followed by Australia business confidence on Tuesday and Australia consumer confidence on Wednesday, along with UK trade balance, GDP, industrial and construction output, China inflation and FOMC minutes. On Thursday are US, Germany and France inflation data, followed by China trade and foreign direct investment data, Japan and Euro area industrial production and US PPI on Friday.

The Weekly Update

The Weekly Update

US 10-Year Treasury yields closed the week (and month/quarter) a fraction of a basis point above 2% after falling a further 5 basis points in what is now an 8-week rally; equities waned a little with the S&P 500 down -0.3% on the week. Much of the week saw muted trading in anticipation of the weekend’s G20 summit offsetting some of the usual end of month/quarter activity. Meanwhile, in Europe Bund 10-year yields fell further into new negative territory reaching -0.335% with credit markets on the whole benefiting from further support.

The Weekly Update

The Weekly Update

Central banks were front and centre last week with significant dovish comments from Draghi and others at the annual European Central Bank Forum and from the Fed rates announcement. Optimistic market sentiment was boosted further by expectations of a reopening of US-China trade talks at the forthcoming G20, with a number of poor economic data readings having little dampening effect on the positive trend. US 10-year Treasury yields – after dipping below 2% midweek – closed out the week just 3 basis points lower but continued the 8-week downward trend to 2.05%. Meanwhile, the S&P 500 touched new-intraday-highs of 2,964, and closed the week up 2.2% at 2,950, with notable performance in energy stocks in-line with the bounce in oil prices. While equity markets are rising on expectations of lower-for-longer-rates helping prop flagging growth, credit markets are tightening over growth concerns and falling inflation expectations.

The Weekly Update

The Weekly Update

Last week we saw the short-end of the market start to price in three 25bp cuts to the funds rate this year and then nothing more, which is a little strange. Some argue for an ‘insurance cut’ as early as this week’s FOMC meeting sighting the Middle East situation, trade tensions and some further evidence of economic weakness, notably the last payrolls data. We feel a cut this week is unlikely; it is also unlikely that the Fed would cut three times and stop as the market is pricing.

The Weekly Update

The Weekly Update

Last week saw US 10-year Treasury yields tightening again - another 4 basis points to 2.08% - now yielding half-a-percent lower than just 6 weeks ago. Safe-haven assets were boosted by further concerns of tariffs on Mexico at the start of the week, along with a disappointing nonfarm payroll figure on Friday which, at just 75k, came in 100k below the 175k consensus estimate (and a downward revision to the previous month’s reading). But unlike most of May, as Treasuries rallied equities were also on the front foot last week, with the S&P 500 up a sharp 4.4% to 2,783, marking the best week for equities in six months. Meanwhile, just after Greek government yields hit all-time lows the European Commission issued a warning, for both Greece and Italy, that  their recent policy choices will hinder their ability to service their debts and meet set targets.

The Weekly Update

The Weekly Update

The slide in equities and US Treasury yields accelerated last week; the 10-year saw yields fall 20 basis points to 2.12%: in a fifth straight week of strengthening from 2.6% in mid-April and demonstrating a strong seven-month trend from November 2018 highs above 3.2%. the S&P 500 had its fourth down week in a row, down 2.6%, and its worst since the tumult around Christmas 2018. Meanwhile, German 10-year Bund yields hit all-time lows of -0.206%: even lower than the negative yields back in mid-2016 when the US 10-year yielded 1.35%. Other negative sentiment signals this week include the Japanese yen strengthening 1% to 108.3 against the dollar, and Emerging Market spreads widening 15-20 basis points (contributing to spreads around 10% higher than at the start of the month but with yields broadly unchanged as risk-off assets rally in isolation).

The Weekly Update

The Weekly Update

After a terrible start to the week, the S&P 500 closed down just -0.76%. US “trade tensions” with the EU and “trade war” with China continued to escalate at the beginning of last week. But following a big dip on Monday, President Trump signalled a postponement of tariffs on European autos helping allay fears, at least in relation to US and European markets. The brinkmanship with China, however, continues with the blacklisting of Huawei in a tat-for-tit against China’s retaliatory 25% tariffs on a further $60 billion of imports after trade talks fell through the week before last.

The Weekly Update

The Weekly Update

Last week was all about the rising trade tensions between the US and China which resulted in ten year UST notes 5bp lower in yield and the S&P 500 index nearly 3% lower on the week.

The threat of tariffs reaches beyond US-China to the US’ other trading partners such as Europe and Japan. Trump has been threatening to impose tariffs on auto imports and a ‘section 232’ report from the US Department of Commerce on February 17 opened the door for him to impose 25% tariffs on auto imports on national security grounds: the President has 90 days to make a decision on this, although with opposition from Congress and with trade talks ongoing the decision could get delayed. Europe agreed a mandate in April to begin negotiations with the US on industrial goods although has threatened to suspend negotiations if auto or further tariffs are imposed.

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