US 10-year Treasury yields rose 6 basis points over the course of last week testing the 3% level again as it did back at the beginning of August; it followed a busy week from central banks outside the US broadly moving in a positive direction, and perhaps being seen to be on track for slowly closing the chasm between interest rate policies on opposite sides of the Atlantic. The S&P 500 Index gained 1.16% recovering the previous week’s losses and the US dollar weakened slightly from 95.37 to 94.93 according to the DXY Index.
The focus of the economic calendar last week was US employment data with a (seasonally adjusted) growth in nonfarm payrolls of 201k, beating forecasts of 190k, but with prior month’s data revised down from 157k to 147k. A concurrent uptick in wages of 2.9% year-on-year (above forecasts of 2.7% and previously lacklustre) gave support to the positive US employment picture; US Treasuries rose 8 basis points over the week to yield 2.94%. Robust PMIs reinforced this narrative with manufacturing PMI hitting a 14 year high of 61.3 and non-manufacturing PMI rising to 58.5. Contrasting this however are the ongoing US trade disputes with data showing a July trade deficit of over $50bn: as its trade deficit with China and the EU hit records of $36.8bn and $17.6bn respectively.
Last week emerging markets continued on edge as the Argentinian peso dropped 7% following President Mauricio Marci’s botched attempt to reassure markets whilst requesting accelerated disbursements from the IMF. Turkey added to the sense of ‘what next’ after a string of unconventional thinking and poor decisions from President Recep Tayyip Erdoğan and his retinue has helped pushed inflation to around 18%, four-times their official target; their central bank is expected to raise rates next week. Both the Argentinian peso and Turkish lira are down more than 40% versus the dollar so far this year with the peso close to losing half its value.
Last week maintained the trend of the previous fortnight in developed markets with US 10-year Treasury yields again marginally down a further 1.3bps from 2.874% to 2.861% and the dollar DXY Index holding around the 96-something range. The US Treasury curve was only marginally flatter after the US achieved a successful sale of nearly $100bn of short term paper. After falling most of 2018 gold may have found a floor after plummeting almost 4% in the first half of the week before recovering half of this to finish the week down -2.2% at 1184.
The US Treasury curve flattened last week despite the record $26bn 10-year issuance; yields fell 7.6bps from 2.950% to 2.874% and 30-year yields moved 5.8bps lower from 3.089% to 3.031%. The Turkish lira continued to set record lows against major currencies as the country wrestles with a crisis that is beginning to rattle other markets. The euro is also facing headwinds because of the crisis with growing concerns from the European Central Bank (ECB) about banks in France, Spain and Italy and their exposure to Turkey's troubles.
Last week saw a fair amount of central bank news and data releases, with most as expected and all having relatively little impact on the markets on the whole. US 10-year Treasuries started and ended the week yielding 2.95% with the dollar slightly stronger by half-a-percent – with the DXY Index rising from 94.67 to 95.15. Trump on the other hand managed to continue to stir-up markets threatening to shut down the government save for the backing of his immigration proposals, and to raise tariffs against China to 20-25% across the board. Last week will also be remembered as the first time a company was valued at $1 trillion: as Apple beat Amazon, Google and Microsoft to the milestone.
A roller coaster week saw further trade rhetoric grab market attention with Trump’s comments such as “Tariffs are the greatest”, and renminbi “has been dropping like a rock” not helping market stability. Fortunately, on Thursday, US-EU trade talks appeared to calm markets. US Q2’18 GDP came in at 4.1%, marginally below expectations; although still a strong reading, Friday saw the S&P fall, dragged by the US tech sector. Meanwhile, the dollar closed the week 0.20% higher, the yield on the 10-year UST moved 6bps higher to 2.96%, and Brent gained 1.67%.
Last week stocks remained broadly flat with light trading as US 10-year Treasury yields rose 4bps (from 2.84% to 2.88%) and the dollar ended the week overall slightly weaker undoing its strength earlier in the week. Also earlier this week Fed Chair Jay Powell left markets guessing with just a couple of words of ad-libbing during his testimony to Congress, stating, “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that (for now) the best way forward is to keep gradually raising the federal funds rate.”
Markets witnessed a rollercoaster week as trade war concerns ramped up; the yield on the 10-year UST was marginally unchanged, although the curve continued to flatten. The US announced a further USD 200bn worth of Chinese imports on which it wishes to impose 10% tariffs; subject to public consultation by the end of August. Calling the new list of tariffs “totally unacceptable” bullying, China vowed once again to retaliate; with the US touting a total of USD 500bn worth of Chinese goods to be subject to tariffs, China may struggle to fight back with the same magnitude, as it only imports ~USD150bn from the United States.
Another mixed week across asset classes saw the yield on the 10-year UST rally 4bps, to 2.82% while the dollar softened 0.54%. Meanwhile, Brent, fell 2.68% after Trump barked that OPEC must “reduce pricing now!”. The renminbi also came back into the spotlight following the recent trade sentiment driven downturn. Although the offshore renminbi was broadly lower against the dollar, it had recovered into the end of the week; we believe the weakness was overdone and expect stability to return and for the currency to strengthen over the long term. The PBoC stated that it is not willing to intervene in the fx market, adding that it will maintain liquidity at reasonable and sufficient levels and that deleveraging remains on track.
A mixed week across asset classes saw the yield on the 10-year close 4bps lower at 2.86%, and the UST curve flatten; the 2s30s spread narrowed further, partly due to a better-than-expected 30-year auction. Meanwhile, global stock markets suffered a sell-off, the dollar was relatively flat, while Brent bounced over 5% to almost $80pb. In terms of key data, the third reading for Q1’18 US GDP disappointed at 2% (from 2.2%) while the US PCE report surprised to the upside at 2%yoy in May. China’s official PMI readings over the weekend remained strong, with the services reading beating expectations.
Tit-for-tat trade rhetoric dominated market focus in what was a fairly light data week; we will continue to monitor developments and negotiations in the coming weeks with the US tariff deadline on China’s goods and services due on July, 6. US internet retailers came under pressure last week after the US Supreme Court ruled that states and local governments can start collecting currently uncharged taxes from sales made online. Closer to home, the BoE stayed pat on rates, however, appeared more hawkish with MPC member Haldane’s surprising switch from hold to hike; the probability for a hike in August spiked above 50% (to 69%) following the meeting. The central bank did note that the soft Q1’18 GDP reading was “temporary”, adding that employment remains strong.
Last week markets awaited the Trump-Kim summit in Singapore, which appeared to go through without a hitch; although nothing concrete was announced. There was some talk of denuclearisation and subsequent US sanction easing, with China also saying it may revise sanctions on the Peninsula. The next key event was the FOMC meeting where, as largely priced in, the Fed hiked rates by 25bps, to 1.75%-2.00%. There was a fairly muted market response following the end of a relatively more hawkish FOMC meeting; the yield curve flattened and the dollar tumbled, although this could have also resulted from the reignition of US-China trade tensions. Flight to safe assets into the week’s close saw the yield on the 10-year close at 2.92%, and the dollar gained 1.34%. The yield curve continued to flatten with the spread between the 2s30s falling to mid-2007 levels.
Last week saw UST yields rise 4.4bps, to touch 2.947%, whist Bunds increased 6.3bps, from 0.386% to 0.449%. Some of this move was a residual retracement of the flight to safety during the Italian one-day blowout but the relatively large move in European debt (Bund yields now more than 16% higher than where they were last week) was chiefly a result of a speech, from ECB Chief Economist, Peter Praet’s on their Asset Purchase Programme (APP) and breaking news that “Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases”.
The main highlights last week were: the ongoing political crisis in Italy, and mounting trade tension concerns following the announcements of US tariffs. So a very mixed week across asset classes witnessed Italy’s yield curve sell-off aggressively, with the 2-year yields spiking as high as 2.84% on Tuesday, eventually settling at ~1% following the swearing in of the new (populist) government on Friday. Meanwhile, the yield on the UST 10-year was marginally lower over the week, at 2.9%. The dollar could not hold onto the early-week gains and was down marginally over the week.
A mixed week across markets saw yields across the UST curve spike; with the 10-year benchmark stabilising within 3% range, at 3.06%. The dollar held onto its weekly gain, and Brent peeked above $80pb intraday on Thursday; closing the week at $78.51pb, 1.8% higher. Meanwhile, equity markets endured a choppy week; the S&P Index eventually closed 0.54% lower.
Mixed Fed rhetoric grabbed market attention, with the likes of Atlanta’s Bostic, once again highlighting his concerns over possible yield curve inversion. The probability of a fourth rate hike this year (or three more) also shot up last week, however, remains below a 35% chance. The next hike is priced in for the central bank meeting next month, with the third (and currently final) rate rise expected in September.
The big news last week was Trump’s withdrawal from the Iran Nuclear Deal; after which he stated that any nations found promoting Iran’s nuclear capabilities will also be sanctioned. Oil endured a bumpy ride as a result through the week, with Brent eventually closing ~3% higher. Higher oil prices fuelled further inflation concerns, which saw UST yields drive back above 3%, however, broadly weaker CPI data prints saw the curve come off recent high yields; with the 10-year eventually closing the week relatively flat, at 2.97%.
Last week the 10-year UST climbed above the “psychological” 3% level and eventually rallied after Draghi’s dovish post-meeting Q&A tones; closing at 2.96%, flat over the week. The US dollar also had a positive week; the DXY Index gained 1.36%. The most closely watched event was the historic Korean summit which saw both leaders cross over each threshold holding hands; North Korea subsequently changed its time zone bringing it in line with South Korea, and stated its denuclearisation intentions. Elsewhere, UK’s economic data disappointed with CPI, growth and wage inflation all below expectations; adverse weather, which doesn’t appear to be shifting any time soon was to blame; expectations for a further tightening have been dampened.
A week of two halves saw the UST yield curve initially flatten, with the 2s30s spread tighten to 2007 pre-GFC levels, only to steepen marginally towards the end of the week following renewed inflation concerns off the back of a crude oil rally, and in anticipation of bumper UST issuance this coming week. Several newswires commented on the inverted yield curve concerns, thus recession fears; we do not foresee a US recession on the immediate horizon, however, have not discounted the possibility in the medium- to long-term. As we have pointed out previously, historically, the UST curve has tended to flatten during tightening cycles, hence our bias towards high-quality, sovereign and quasi-sovereign, hard-currency bonds at the longer end.
Trade sentiment made a sharp u-turn last week, following the more conciliatory tones from China and the US, coupled with Trump announcing his wishes to re-join the TPP. Market focus therefore rapidly shifted to geopolitical tensions which ramped up off the back of the ongoing conflict in Syria; with the US-led trilateral airstrike following Friday's market close. UST 10-year yields ended the week up 5bps, to 2.83%. The DXY (dollar) Index couldn't hold above the 90 level, tumbling 0.34% last week. Also of note is the continued UST curve flattening, which saw the 2s10s spread to fall to decade lows by close last week. As regular readers are aware, we have favoured a bias toward the longer-end of the curve with a single A credit profile across all portfolios. Meanwhile, oil rallied off the back of highest geopolitical tensions; brent was up over 8% last week.