The Weekly Update

Last week witnessed another dramatic week in the White House. Mr. Trump managed to offend a number of Americans with his handling of the unfortunate incident in Charlottesville, with the last bullet in the foot resulting in the disbandment of his business councils which were initially set up to advise Trump on economic policy and agenda. Although the expectedly dovish notes from the FOMC July minutes were ‘blamed’ for the move lower in the dollar and US Treasury yields on Wednesday, it appears the market is becoming increasingly concerned about the US presidential administration. Incidentally, White House’s chief strategist, Bannon resigned on Friday. US Treasury yields were marginally higher over the week at 2.195%, despite trading as high as 2.28% mid-week. Going back to the Fed, the much talked about lowly inflation continues to split central bank opinion; the market is not pricing in a high chance of a Fed hike this year as a result, and expectations for the balance sheet unwind are unchanged, a September announcement is expected.

There were a number of key US data releases for July and August, which were unfortunately overshadowed by the in-house politics. Retail sales gained pace in July (alongside an upward revision in June), the control group reading, a component of GDP, was up 0.6%, versus expectations for +0.4%. Empire manufacturing also surprised to the upside at 25.2 in August, from 9.8 previously. Housing starts and building permits on the other hand disappointed, with single- and multi-family homes (apartment buildings) leading the decline. Despite ongoing turbulence in the US, business sentiment remains robust. Today kicks off with the Chicago Fed National Activity Index; which had spiked higher in June, Markit PMIs follow on Wednesday and Friday July durable goods orders will be of interest.

Elsewhere, the IMF revised its growth forecasts for China to 6.4%, from 6.0%, through to 2020. The IMF estimated that government, corporate and household debt could increase to 300% of GDP by 2022, from 242% in 2016 adding, ‘Given strong growth momentum, now is the time to intensify these deleveraging efforts’. Chinese debt to GDP ratios are frequently used to support a negative outlook for the renminbi, with some observers citing the country’s debt at 250% of GDP currently; which is indeed high. However, these ‘estimates’ are also misleading they do not take account the assets on the other side of the balance sheet. On the previous basis, the US debt to GDP ratio is 331% of GDP. If one focusses solely on government debt, the figures look very different. Using IMF forecasts for 2022, China’s government debt will stand at 58.9%, which is far lower than most other countries. The Chinese renminbi was relatively flat over the week. As of Friday’s close, we calculate that the carry on the offshore currency stands at 3% year-to-date, with total return at 7.40% against the dollar.

With a pretty thin data week ahead, focus will fall on the Jackson Hole gathering, starting on Thursday; it will be interesting to see if ECB President Draghi will discuss QE, especially there have been a number of conflicting reports. We may have more of an idea where Super Mario stands in regard to tapering and the ‘euro overshoot’ on Wednesday, when he speaks at a symposium in Lindau, Germany. Fed Chair Yellen is said to be discussing financial stability at Jackson Hole, on Friday. Also later today Trump will discuss America’s strategic path ahead in Afghanistan and South Asia; almost 16 years after the war started. Of course the US-North Korea situation will be monitored closely this week as both sides undergo military drills.

The Weekly Update

Geopolitical tensions between the US and North Korea ramped up last week; silver (+5.2%), gold (+2.4%), the yen (+1.37%), Swiss franc (+1.13%) and US Treasuries were the main beneficiaries of the risk-off market tone last week. The yield on the 10-year UST fell 7bps to 2.19%. The dollar (DXY Index) on the other hand came under pressure, falling 0.51% over the week. Equity markets broadly fell over the week, and the VIX (volatility) Index spiked ~55% over the week; and hit an intraday high of 17.28 on Friday. Meanwhile, the renminbi, considered a ‘hedge’ by some, was the top performing EM currency against the dollar last week; CNH gained 0.88%.

Elsewhere, further dovish tones from Fed members dominated newswires. The general theme appears to be for a break in rate hikes this year, and a focus on unwinding the massive balance sheet as a tightening tool. Inflation, or lack of, remains on members’ lips, as it continues to ‘surprise to the downside’ Bullard said, adding that rates should be left where they are for the time being. He went on to say that he is ‘ready to get going in September’ for balance sheet tightening which he expects will be ‘very slow’ with little impact on the markets. Kashkari, also concerned about lowly price levels highlighted that the Fed wishes to ensure investors have faith in the central bank stating, ‘it actually matters that investors believe the Fed can achieve its goals, because then if there’s a future crisis and we really need people to believe in us, we’ve earned and established that credibility.’ In terms of data, the JOLTS reading bounced to an all-time high in July, breathing some life into the dollar. PPI releases broadly disappointed, with -0.1%mom core print missing expectations, the 1.8%yoy reading also fell from June levels. A bounce in the consumer confidence readings saw the dollar spike higher on Thursday, as did the monthly budget statement; where the budget deficit was better than expected in July, at USD 43bn. The much awaited CPI releases for July remained soft, further underscoring concerns over when the Fed’s 2% target will be met.

This week will see import and export indexes for July, and Empire Manufacturing later today, the latter is expected to come in slightly higher in July. Retail sales will grab market attention, especially as previous June readings had disappointed. Housing starts and business permit prints, followed by the FOMC minutes from last month’s meeting will be released on Wednesday; we expect the minutes will remain sharply unchanged. Sentiment and confidence readings on Thursday and Friday could be interesting, as they remain largely mixed.

Elsewhere, although China’s exports and imports dipped slightly in July the  readings remain robust and had little impact on markets. CPI was marginally softer on July at 1.4% yoy and PPI was unchanged at 5.5%, so again nothing to write home about. The stronger than expected fx reserve reading in July, however, nudged the renminbi higher. Key activity data from China featured this morning: retail sales, fixed assets and industrial production releases all softened last month, there are thus concerns that Q3’17 growth may dip slightly. However, policymakers have reiterated they are willing to accept that softer growth, around 6.5%. There is little more in the way of key data releases for the rest of the week. However, geopolitical concerns with neighbouring North Korea and India may continue to hold market focus.

The Weekly Update

There was little excitement across markets as the ‘summer’ holidays kicked off in true British style; with rain. There were a couple of events of note, first was the BoE policy meeting, the central bank held rates and appeared more dovish than markets had expected; sterling tumbled 1.14% and 10-year Gilt yields fell 4bps over the week. The sharp move lower came off the back of revised growth forecasts; the BoE trimmed this year’s growth to 1.75%, from 1.9%, with a marginal downgrade to 1.6% for 2018. Exports are expected to be the main driver of growth and consumption the drag; resulting from sluggish wage growth. The BOE’s Carney noted that the demise of sterling was to blame for the sharp upturn in CPI readings, and the central bank expects inflation will peak at 3% by October, before moderating to 2.2% by 2020. Industrial and manufacturing production and construction releases for June may be of some interest this week, with the latter the only reading expected to see a positive reading. Also, Brexit uncertainties remain with Carney noting, ‘the assumption of a smooth transition to a new economic relationship with the EU will be tested.’

The other ‘major’ event was the US employment data dump; where 209k jobs were added in July, employment dropped a tenth to 4.3%, and average hourly earnings grew slightly to 2.5%. Having fallen ahead of the employment report, US Treasury yields witnessed a spike after the more positive data; settling 3bps lower over the week, to 2.26%. While the Fed can be considered to have reached its maximum employment goal, the price stability objective is proving much trickier with the Fed’s favoured inflation measure (personal consumption expenditure) languishing below the 2% goal. Opinion is split among committee members, with some viewing the softening in inflation as transitory and others concerned that progress towards the objective may have slowed, thus softness could persist. To us, this implies a cautious and gradual approach to any further rate rises and downside risk to the ‘dot plot’. The dollar finally enjoyed a rally after the stronger employment data was released, ending the week up 0.30%, measured by the DXY Index.

Today is a pretty quiet day in terms of key US economic data releases, Tuesday’s JOLTS job openings reading for June will be watched closely. On Thursday we’ll see a number of PPI data releases, followed by the monthly budget statement and CPI readings will grab market attention on Friday; market expectations are for an increase in core prices, to 1.7%yoy. The Fed’s Bullard and Kashkari will speak today, with Dudley following on Thursday and Kaplan and Kashkari speak on Friday. The market will be looking for further clues on Fed tapering.

Elsewhere, as US-China trade concerns ramped up last week, with no further updates on Friday as Trump’s White House address regarding China’s trade and intellectual property practices was cancelled. Meanwhile, in what was a data thin week for China, there were a number of headlines stating that the PBoC could widen the currency's trading bands, from 2% to 3%; as the currency has easily traded within the 2% band, since the fixing mechanism was reformed back in 2015, the widening impact may be limited. A government advisor mentioned that the move to widen the bands ‘may just be a gesture to express the commitment to long-term market reform.’ This week’s data prints were kicked-off by better than expected fx reserves, which came out this morning at USD 3,080.7tn in July. Imports and exports and trade balance numbers will take centre stage on Tuesday, and CPI and PPI readings are expected to come in at 1.5% (unchanged) and 5.6% (marginally higher) on Wednesday.

Last week the bond market witnessed rare issuance from Iraq. The USD 1bn, 5-year deal, came to the market at a yield of 6.75%, very attractive levels for those on the hunt for yield; so much so that the bond was reportedly 7 times oversubscribed. The deal was also brought to the market by high tier global investment banks: Citi, Deutsche Bank and JPMorgan. Although the country sits on the world's 5th largest hydrocarbon reserves and has an NFA score of 3 stars, this issue is not one for us. For starters most readers will be aware that we favour investment grade bonds across our portfolios; this bond is rated B- by Fitch, and S&P rates the country B-. Next, using our proprietary Relative Value Models, we calculate that this bond at issue was actually expensive. Issued at a spread of 493.10bps over Treasuries, that may seem like sufficient cushion for what most would call a war-torn and highly unstable country’s debt. However, we calculate that bonds with a similar rating and duration trade at ~557bps over; implying that the bond was priced 0.60 credit notches expensive. We expect little in the way of new issuance over the next few weeks with most of the market out on holidays.

The Weekly Update

Although no change to the Fed Fund Rates was expected to be announced last week, markets did appear slightly uptight ahead of the FOMC meeting; mostly in anticipation for an update on the balance sheet unwind. The message was that if the economy remains on its current trajectory, the central bank will look to commence the unwind of its balance sheet ‘relatively soon’; we interpret this as a September announcement with a taper move in October, currently. The only significant change to language was that inflation is now running ‘below’, from ‘somewhat below’, the Fed’s 2% target. The Fed’s favoured PCE core reading for Q2’17 came in at only 0.9%qoq, from a downwardly revised 1.2% first quarter. The Fed’s Kashkari stated that he has been in favour of slowly reducing the balance sheet despite his concerns over inflation.

US Treasuries sold-off after a bout of better than expected Markit PMIs and confidence data earlier in the week, remained largely flat ahead of the FOMC meeting, rallying off the more dovish picture, eventually moving higher towards the end of the week. The benchmark 10-year, closed 5bps higher last week, at 2.29%. The dollar remained relatively flat in the days leading up to the FOMC gathering, but collapsed thereafter. Stronger data on Thursday, including improved durable goods (due to a pick up in aircraft orders) and bloomberg consumer confidence, and a bounce back into positive territory of the Chicago Fed Activity Index, saw a slight bounce up in the dollar. Growth in the second quarter was stronger at 2.6%, but missed expectations, with the employment sector remaining a drag; mostly resulting from poor wage growth. This coupled with continued in house politics over the healthcare and tax reform once again saw the greenback struggle to find its feet; with the DXY index falling 0.64% over the week.

Later today we have the July Chicago purchasing managers index, and pending home sales readings. A pretty data heavy Tuesday kicks-off with personal income and spending; the former expected to come in unchanged at 0.2%. The Fed’s favoured PCE prints follow, with softer than previous ISM manufacturing expected in the late afternoon. The ADP employment change for July will hit the screens on Wednesday, +190k expected. This will be followed by Markit services and composite PMIs, and factory and durable goods orders. The all important employment data takes centre stage on Friday, where markets are looking for an additional 180k jobs in July, unemployment to have fallen to 4.3% and average hourly earning up marginally to 0.3%mom. With ‘recess’ upon us for the next month or so, markets should remain fairly balanced, with few surprises from a central bank perspective; that is after Wednesday’s BoE meeting. The upcoming debt ceiling deadline in the US will however grab some attention; particularly as Mr. Trump attempts to push forward with his growth-driven spending reforms.

The commodity market enjoyed a bounce last week, with the likes of Brent Crude gaining 9.3%. Metals continued to perform well off the back of stronger growth prospects in China. Copper was a stand out performer last week, up 5.35%. One of our favoured holdings in Southern Copper 7.5% 2035’s has rallied to 4-year highs this month. The Baa2/BBB+ bond continues to offer exceptional risk-adjusted expected returns of around 14.5% with an attractive yield of 5.25%, and 3.3 notches of credit notch cushion. The US company is headquartered in Phoenix Arizona with mining activity predominantly undertaken in Peru and Chile.

Elsewhere, the offshore renminbi gained 0.3% against the dollar over the week. Economic data releases continue to firm up growth stability, with industrial profits up 19.1% in June. This jump in profits will no doubt allow policymakers room to clean-up the country’s debt; one of the main agendas stated at the financial work conference. Some other good news came from rating agency, Moody’s who upgraded its outlook for China’s banks to stable. Yulian Wan, a Moody’s analyst noted that the upgrade reflects ‘our expectations that non-performing loan formation rates will be relatively stable at current levels’, adding that the ‘government's adoption of more coordinated policy measures to curb shadow banking will help mitigate asset risks for banks, and address some key imbalances in the financial system’. In what is a very light data week for China, this morning opened with PMI readings for July which were marginally softer than expected, but remained in expansion territory; adverse hot weather, and floods in southern China resulted in slower production. The only other data releases this week are the Caixin PMI prints.

As we usher in August, a historically quiet time, we suspect geopolitical concerns will continue to plague markets. The likes of North Korea launching another ICBM, Trump’s strong comments to China, ongoing Sino-US trade struggles, and Russia's response to US sanctions, are amongst some of the key events we will be monitoring this week.

The Weekly Update

A broadly positive week across asset markets witnessed volatility collapse; the VIX Index traded near all-time lows through most of last week, and on Thursday the Merrill Lynch Move Index dived to its lowest level since it was first published in 1988. The Move Index measures the volatility on one-month UST options based on the 2,5,10 and 30-year benchmarks; the Index has fallen ~34% so far this year. With the upcoming central bank summer lull approaching, asset markets once again clung onto any indications of monetary policy tweaks last week; muted inflation pressures remained the overriding theme.

The ECB surprised the market with a relatively dovish statement, leaving both rates and QE unchanged; with Draghi stating that recent data prints have confirmed a strengthening economy. Following the mini taper-tantrum post-Sintra, Draghi appeared to blame the market for its over-interpretation over his comments on ‘reflation’, he stated that although risks are broadly balanced, inflationary pressures remain weak. The all important QE taper was not addressed, however, Draghi said tightening too early could jeopardise recovery; stating the central bank must be persistent, patient and prudent. The Jackson Hole gathering in late-August may bring some more colour, in the meantime markets are looking for a September taper announcement - at the earliest - in preparation for a Q1’18 move. The more cautious tone did not slow the euro’s continued assault against the dollar; rallying to a two year high. So all-in-all pretty much a non-event in terms of new information, in-line with the earlier BoJ meeting, where the central bank maintained its policy stance off the back of painfully low inflation; and once again pushed expectations for a pickup in inflation to 2%, into FY’19. Should be interesting to see what the BoE says next week, after the ‘disappointing’ June CPI reading; 2.6% versus expectations for +2.9%; it seems the ‘Brexit-effect’ is making hard work of predicting inflation going forward.

This week’s data flow was kicked off with Japan’s preliminary manufacturing PMI reading for July, down from June’s level, but remaining in expansionary territory, at 52.2. Later we will also get the initial PMI releases for the eurozone. There is not much in the way of key data until Q2’17 final UK GDP on Wednesday, on Friday job sector prints and CPI will be watched closely in Japan, and eurozone confidence reports will be of interest, especially after the recent bullish sentiment in the region.

This morning we heard that the IMF has cut its forecasts to UK growth this year to 1.7% resulting from recent ‘tepid growth’, adding that ‘The ultimate impact of Brexit on the United Kingdom remains unclear.’ The Fund’s economic counsellor, Maurice Obstfeld went on to say that although global growth recovery is firmer, as a result of stronger expansion from the likes of China, the US’ growth downgrade is significant. Growth forecasts for the world’s largest economy were markedly cut to 2.1% for 2017 and 2018, from 2.3% and 2.5% respectively, ‘because near-term US fiscal policy looks less likely to be expansionary’.

Staying with the US, the Russia-Trump developments coupled with the Trump-administration’s inability to get the latest iteration of the healthcare bill passed did little to help the dollar back on its feet. Doubts over whether the president will be able to move forth with his fiscal reform agenda have somewhat increased. As such the DXY Index continued its relentless slide to year lows, falling 8.2% ytd by Friday's close, and US Treasuries enjoyed a bounce with the 10-year benchmark yield falling 10bps to 2.24%. A pretty heavy data week ahead kicks-off later today with the Markit PMIs, along with existing home sales. On Tuesday the main bit of data will be the Conf. Board consumer confidence reading, which the market expects will have slipped slightly in May. Thursday will see some property sector data, and the July FOMC meeting, where no rate hike is expected, however, markets will be listening closely to any taper chat. Chicago Fed National Activity Index will grab some attention on Thursday afternoon, especially after the weak reading in May. Then on Friday the second quarter GDP figure will be of interest, expected at an annualised 2.6% qoq, and of course the Fed’s favoured Core PCE reading will garner some attention. Political events will be watched closely this week, starting with Trump Jr. and Kushner’s testimony in front of the Senate intelligence committee, over Russia’s alleged involvement in last year’s US election.

Also last week, the US-China Comprehensive Economic Dialogue (CED) appeared ‘unfriendly’ with no joint statement released, and the closing news conference was called off. Separate statements were released later, with both countries stating a willingness to work constructively and cooperatively. As the world’s two largest economies strive to re-mold their trade-relationship in an attempt to prevent a trade war, the one bit of good news was that after a decade of toing and froing, the US will now be able to ship rice to China; the largest producer, consumer and importer of the commodity. Further trade developments will no doubt be watched closely by the market in the coming week.

Back to China, economic data releases remained robust, taking a number of market makers by surprise. China’s economy expanded by 6.9% yoy H1’17, against market expectations for 6.8% growth, industrial production and retail sales numbers also surprised to the upside. Stronger domestic demand coupled with the stable manufacturing sector, off the back of a marginal pick-up in global growth conditions, have helped maintain stability amid the government’s push to deleverage, in support of the real economy. The renminbi remained stable against the CFETS basket, and strengthened against the dollar over the week helped by strong macro data, increasing fx reserves, and recent comments from the president reiterating the need to keep the exchange rate basically stable at a reasonable equilibrium level.  We continue to view the renminbi as being undervalued and expect longer term appreciation against the broadly weaker dollar, especially as market confidence in the renminbi appears to be strengthening, with devaluation expectations shrinking. Markets will also be looking to further updates on the government's public sector deleverage push, where last week President Jinping stated that local governments and state-owned enterprises will come under scrutiny to reduce borrowing.

As for our portfolios, the risk-on sentiment helped boost positions across the board. A rally in crude coupled with improved sentiment - off a positive rating report by S&P - saw holdings in the sovereign and quasi-sovereign space receive a boost. The Middle Eastern region also benefitted from the the stabilisation of oil prices; the Qatar curve had a bias of strength at the long-end, thus flattening. Our sovereign and quasi-sovereign holdings are trading at year-to-date averages, and continue to offer attractive risk adjusted returns, with ~4 notches of credit cushion. This week, we expect markets will be keeping a close eye on the developments within the region, after the announcement last week that Qatar had made changes to its anti-terror rules.

The Weekly Update

Last week witnessed further ‘upbeat’ central bank rhetoric as markets continued to cling onto even the slightest bit of optimism. The BoC hiked, as expected, by 25bps to 0.75% (with a continued hawkish stance). Meanwhile news reports suggested the ECB would look to begin tapering next year; following a September announcement. Also, the BoE’s McCafferty’s hawkish comments saw 10-year Gilt yields move higher.

However, the main focus for markets last week was Fed Chair Yellen’s testimony to Congress on semi-annual monetary policy; where she appeared more dovish than expected. Although ‘transitory’, Yellen confirmed that inflation remains well below the 2% target, adding that ‘there could be more going on there’. She also highlighted concerns over ‘uncertainty about when - and how much - inflation will respond to tightening resource utilisation’. As for future rate hikes, from the sounds of it the central bank sees no urgency or necessity to hike, we expect Fed Funds rates to remain lower for longer; as the central bank strives to achieve a balanced dual mandate. Following the testimony, the futures market repriced its expectations for another hike this year, the probability of a move in December fell below 50%. Off the back of Yellen's testimony on Wednesday the DXY (dollar) Index slid to year lows, weak data prints did little to stabilise the greenback, which fell almost 1% over the week.

US data was once again broadly disappointing: JOLTS jobs missed expectations in May, April’s reading was also revised lower. PPI and CPI readings on the whole missed expectations; CPI came in at 1.6% yoy in June, while the core reading remained stable at 1.7%. Retail sales also missed market calls, with the control group (a component of GDP) actually falling in June. US Treasuries rallied off the back of this and the yield on the 10 year closed 6bps lower, at 2.33%. This week will be light in terms of key data releases. However, one to watch could be today’s Empire Manufacturing reading, which is expected to have fallen this month. On Wednesday, housing starts and building permits will also grab some attention as the market expects a bounce in June and the week ends with the Bloomberg Consumer confidence. With little in the way of Fed chat, market focus will no doubt turn to the BoJ and ECB policy meetings on Thursday; where taper details are expected at the latter.

China data once again surprised to the upside, with FDI bouncing +2.3% (in CNY terms). Export and import data was also positive, beating market expectations at +11.3% and +17.2%, respectively; the trade balance was marginally unchanged at USD 42.08bn. The renminbi enjoyed a rally against the dollar, with CNY gaining 0.44% on the week. Rating agency Fitch reaffirmed China’s rating at A+. This morning saw strong key data releases from China: Q2’17 GDP beat expectations at 6.9%, retail sales, industrial production and fixed assets were also strong in June. The resilient data will allow policymakers further space to maintain the deleveraging programme. The rest of the week is pretty quiet, ahead of June industrial profits on Thursday.

Other good news last week came from Qatar; which was the regional outperformer as investors continued to add risk; particularly at the longer end of the curve. Our sovereign and quasi-sovereign holdings rallied over the week following US Secretary of State, Rex Tillerson’s comments on the ‘very reasonable’ position of Qatar, and the signing of (an apparently year-in-the-making) memorandum uniting their commitments against terrorism and terrorism financing. As Qatar continues to make reasonable (internationally recognised) concessions on the most important issues this adds further pressure for the countries leading the boycott to concede on their more prejudice demands. A full resolution is still going to take time, no one is expecting an immediate breakthrough. First, the agreement with the US doesn’t have any implications for the influential and contentious Al Jazeera. Second, it clearly does not mean withdrawing involvement in the Gaza Strip; Qatar also affirmed their continued support of development and reconstruction projects in the Hamas controlled region. However, with these developments and the likes of Tillerson (and Boris Johnson) throwing their weight behind the mediations a reasonable resolution is starting to take shape.

With the recent rally, the region’s bonds are now trading around year-to-date averages and according to our proprietary model still offer significant relative value for Aa3 rated bonds from the richest country per capita in the world. Qatar’s underlying fundamentals, its constrained engagement with the spat thus far, the mutual benefit to all of a resolution and now the increasing international support for swift mediation add further support to our confidence in the region.

The weekly Update - A global review

A mixed week across asset classes witnessed the global bond rout continue as the market continued to absorb the more hawkish central bank tones. BoE chat was watched closely after the mini-taper tantrum last week, where further conversations were had regarding ‘the continued economic recovery… opening the perspective of a monetary policy normalization’ and there may be a couple of ‘modest rate rises’. Elsewhere, the weak French 30-year auction on Thursday did little to settle markets, German Bund yields bounced and once the 10-year yield breached 0.5% the curve witnessed a sell-off and other sovereign curves quickly followed. Although the JGB curve was not as acutely affected, the 10-year yield did breach tolerance levels and the BoJ responded by intervening to control the yield curve announcing an unlimited fixed price 10-year purchase programme capped at 0.11% to bring the yield back within its targeted 0.10% upper band; the benchmark eventually closed at 0.082% on Friday. The last time the central bank intervened was back in February, 5 months after the policy was introduced.

Staying with Japan, this morning Japan Governor Haruhiko Kuroda said he expects the economy to ‘continue expanding moderately ahead’, and the BoJ stated that ‘exports are increasing’ adding that the ‘Job market continues to tighten… helping consumption gather momentum’. Despite the more upbeat sentiment, Kuroda maintained ultra-loose monetary policy is necessary until inflation moves to stabilise above the 2% target; inflation is currently at a lackluster 0.4%. On the data front, this morning the machine orders print failed to meet expectations, falling 3.6% in June. Japan’s current account surplus for May also disappointed, shrinking on the back of increased imports. The only other noteworthy data this week will be June PPI on Wednesday, where it is expected to come in flat on a month-on-month basis, and fall to 2% yoy. Industrial production and capacity utilisation may grab some interest on  Friday.

Elsewhere, the sharply unchanged Fed minutes from the June meeting, released on Wednesday showed that Fed members are unable to agree on future monetary policy mixes. Some called for a delay in hikes, instead looking for the balance sheet unwind to commence in ‘a couple months’; we view this as a September announcement. Meanwhile, some members were the least bit concerned about ‘transitory’ lacklustre inflation, while ‘several participants expressed concern that progress towards the committee's two percent longer-run inflation objective might have slowed’. There was little change to the futures market’s expectations, with the probability of a rate hike by December being priced in at ~52%. On Friday we had the much awaited employment numbers for June, which saw the better than expected non-farm payroll report; 222k jobs were created and there was an upward revision to previous numbers. Other readings missed expectations with unemployment tracking higher to 4.4% despite the participation rate edging marginally higher. Average hourly earnings also disappointed, at 0.2% mom and 2.5yoy, with May’s readings revised lower too. Despite the broadly disappointing numbers, it seems the market’s overly optimistic sentiment is grabbing onto any positive news; thus the yield on the 10-year closed 8bps higher last week, at 2.386%. The dollar (DXY Index) also got a boost off the better than expected non-farm reading, gaining 0.4%.

This week markets will be looking for a positive JOLTS job opening report in the US to support the labour sectors recent strength. The Beige Book should be of some interest on Wednesday with June inflation prints following. Markets will also be looking for any further clues on monetary policy and balance sheet unwinding as Fed Chair Yellen delivers her semi-annual testimony to Congress on Wednesday and Thursday. On Friday, US retail sales figures will be watched closely especially after the disappointing numbers in May; with the Fed watching the control group number, a component of GDP. Markets will also be listening closely to Fedchat this week with the likes of Williams and Brainard on Tuesday, and Kaplan on Friday.

Elsewhere, China’s renminbi weakened marginally, the offshore currency fell 0.34% against the stronger dollar last week. China has of late shown a tolerance for a stronger currency, aimed at attracting further inflows into its capital markets. Meanwhile, cross border flows appear to have stabilised with fx reserves higher in June at USD 3.0568tn. Aside for the successful launch of Bond Connect on the 3rd July, there was not much to report from China from an economic standpoint. Politically it seems Sino-US tensions have reappeared after North Korea’s launching of an intercontinental ballistic missile (ICBM) struck a nerve in the US, with Trump saying he could respond with some ‘very severe things’. Xi Jinping met with Russia's Putin, last week and referred to Russia as China’s foremost ally; both parties responded with calm restraint after North Korea's successful test launch.

This week’s data releases began with this morning’s China’s CPI reading for June, which slightly missed expectations coming in unchanged at 1.5%, PPI was also unmoved at 5.5%. Looking ahead, China’s trade data will be observed on Thursday where, in dollar terms, the market expects exports to have grown 9%, while imports are expected slightly lower from May, at 14%. Away from data, on Friday, China’s financial work conference will announce its framework for the financial regulatory regime.

The Weekly Update

Half a year gone… how time flies when you are having fun… It was all fun and games last week as markets attempted to deconstruct new-found central bank hawkishness. Speaking in London last week, Fed Chair, Janet Yellen remained true to herself divulging very little in the way of monetary policy updates saying ‘raise interest rates very gradually’; although other Fed chat was more hawkish. One thing of interest that equity markets did react to was Yellen’s statement regarding the ‘somewhat rich’ asset valuations. Vice Chair, Fischer also voiced his concerns over the ‘rise in valuation pressures’ adding that although leverage across the system does not appear to have increased, the situation should be monitored.

No new information was provided regarding the unwinding of the balance sheet, however the market is still looking for a September announcement. We suspect the Fed (although the wording has been dulled down) to still remain data dependant, especially with the recent mixed economic data, and the central bank also appears wary of the Trump-administration and its ability to maintain economic and political stability. To this point, the IMF appeared to mock the US administration's growth estimates calling them ‘extremely optimistic’, adding that ‘Even with an ideal constellation of pro-growth policies’ it is unlikely that it will result in a 1% boost to GDP. GDP forecasts were therefore revised lower to: 2.1% for 2017 and 2018 from 2.3% and 2.5% respectively. In the same report, the IMF appeared to warn the Trump administration against devolving cross-border trade practice, stating the move could result in ‘downside risk to trade, sentiment and growth’. However, on the back of the more hawkish Fed rhetoric, and broader positive market sentiment towards global growth, although still subdued - alongside lackluster inflation - the yield on the 10-year UST bounced 16bps higher to 2.31%. The dollar (DXY Index) however remained on the back foot falling 1.69% over the week; despite the stronger Chicago PMI reading and an improvement in the university of  Michigan sentiment on Friday.

US economic data has remained mixed, with the likes of the preliminary durable goods orders and mortgage application readings missing estimates. The Chicago Fed National Activity Index also surprised to the downside, falling -0.26 (versus expectations for +0.2). The final read for Q1’17 growth however improved to 1.4% driven by stronger personal consumption, while the Fed’s favoured PCE Core Index fell to a disappointing 1.4% yoy. A data heavy week ahead will start with PMI and ISM readings for June, market consensus is for an improvement in ISM manufacturing to 55.2. On Tuesday, markets will be relatively quiet with the US out celebrating the 4th July holiday. On Wednesday the final factory and durable goods orders will grab some attention before the release of the June FOMC minutes; nothing profound is expected to be divulged. ADP employment change will be watched closely on Thursday ahead of the much anticipated employment releases due on Friday, where markets expect that 177k jobs were created in June, unemployment was unchanged at 4.3%, with a marginal gain in average hourly earnings. Also on Friday the Fed will release its Monetary Policy Report, ahead of Fed Chair Yellen’s testimony next week (12th July), this will no doubt be of some interest; with markets also looking for any further clues from the likes of the Fed’s Bullard, Powell and Fischer who speak this week.

Moving back to central banks, the ECB had to backtrack a little last week after Draghi sounded particularly optimistic, signalling that the central bank could look to taper its (EUR 2.3tn) bond-buying program; the EUR rocketed after these comments to a year high against the dollar and bund yields tracked higher. Off the back of the unexpected knee-jerk market reactions, the ECB appeared to calm the excitement saying that the central bank’s policy stance is currently unchanged though slightly more hawkish than the previous minutes, also highlighting the lack of inflationary pressures and the slack in the labour market remains a concern. The BoE also appeared more hawkish, with Chief Mark Carney suggesting that some removal of monetary stimulus could become necessary, as higher economic growth could eventually lead to a rate hike; sterling surged against the dollar on the back of this, closing the week above 1.30. The final reading for UK Q1’17 GDP came in line with expectations at 0.2% qoq, thus 2% yoy.

In Europe, this week’s data comprises of the euro area's final manufacturing PMI print, which was released this morning, marginally higher at 57.4, and the unemployment rate in May remained unchanged at 9.3%. The EC’s PPI release on Tuesday will be of some interest, expected to have fallen in May. The euro area's Markit PMI and retail sales readings follow on Wednesday, with German trade data and industrial production in France and the UK releases on Thursday.

Meanwhile, the Chinese renminbi had a positive week, with the offshore currency gaining 0.82% against the dollar. Industrial profits were up in May and PMI data was released stronger than expected and well in expansionary territory. The Caixin manufacturing PMI print released this morning beat market expectations, hurdling into expansionary territory once again. The China Beige Book International (CBBI) last week  showed that although the property sector has cooled slightly, the rest of the economy has continued to improve; with the likes of manufacturing and retail strengthening, alongside an expansion in hiring and increased revenues across Chinese firms. This is all positive news ahead of the 19th Party Congress in mid-October.

In the meantime news reports suggest that Chinese and Russian companies are set to sign a multitude of business deals during President Xi Jinping’s two-day visit to Russia this week; said to be worth ~USD10bn. Also on the table will be the discussion on ‘deepening the relations of comprehensive strategic partnership and cooperations and strengthening political trust between the two countries’, according to Lu Kang, China's foreign ministry spokesman. The country’s commerce ministry has said that as much as USD 80bn worth of Sino-Russian trade deals will be in operation by the end of this year.

So expect a busy week ahead for China, especially as ‘Bond Connect’ is set to launch today (which also marks Hong Kong’s 20th anniversary of the handover), Bloomberg expects it will be ‘the world’s biggest-ever financial product offering. This is a new platform designed to allow foreign investors access to the USD 9.4tn China-Hong Kong Bond Market without a quota or other technical hurdles. This development coupled with improved accessibility will no doubt see the EM bond indices either include China (e.g. JP Morgan), or increase their holdings in the bond markets. On the data front, Caixin released a series of stronger PMI readings for June this morning and on Friday we will have an idea of the country’s FX reserves which are expected to remain above USD 3tn.

Elsewhere, as the Qatar-Gulf situation continues to unfold, it was a pretty quiet week with the region celebrating Eid. Price movement was marginally changed at the long-end of the curve, where we are holders, while the short-end suffered further selling pressure, as it has since the onset of the ‘crisis’. We heard this morning that Qatar has been given a 48 hour extension to comply to the Saudi-led demands; Qatar have maintained that it is willing to enter into a dialogue, but is not willing to put its sovereignty at risk; which is how it has interpreted the list of 13 demands. Foreign ministers from Saudi Arabia, Bahrain, Egypt and the UAE are set to congregate in Cairo on Wednesday to discuss the situation further. We will continue to monitor the developments and currently remain comfortable with our holdings in the region.

The Weekly Update

A relatively quiet week on the data front saw market sentiment driven mostly by central bank rhetoric and politics.  The yield on the 10-year US Treasury was marginally lower over the week at 2.14%, and the dollar relatively unchanged. The big story was oil’s fall to year lows during the week; crude prices did however pare losses and stabilised towards the end of the week; with Brent closing at $45.54pb, down 3.86% over the week.

Other big news last week was Saudi Arabia’s list of 13 demands presented to Qatar including: cutting alleged ties with Iran, shutting down Al-Jazeera and other state sponsored news outlets and cutting military ties with Turkey, amongst others. Having been given ten days to comply, Qatar’s foreign minister rejected the terms over the weekend stating that the conditions had ‘nothing to do with combating terrorism’, rather ‘limiting Qatar's sovereignty, and outsourcing our foreign policy’. However, this does not mean that Qatar is not open to discuss the conditions, with US Secretary of State Rex Tillerson stating that Qatar will find it ‘very difficult’ to fully comply, but that there are ‘significant areas which provide a basis for ongoing dialogue leading to a resolution’. The US has also stated its willingness to assist in mediation efforts with the Emir of Kuwait to lead to a resolution. We will continue to monitor the situation as it unfolds, with GCC nations celebrating the Eid holidays pricing on the bonds will be limited during the first half of the week.

Elsewhere, US Fed members discussed inflation expectations, and thus monetary policy and balance sheet tightening. A dovish Bullard highlighted the Fed’s projected Fed-funds rate at 3% over the next 2.5 years is ‘unnecessarily aggressive’, adding that benign inflation concerns are warranted. He believes that the shrinking of the balance sheet should ‘start sooner rather than later’; with an announcement expected in September. San Fran President Williams stated this unwind will commence later this year but that a ‘baby step’ approach should be adopted. Meanwhile 34 of the largest US banks passed initial Fed stress tests. Speaking in front of the Banking Senate Committee, Fed governor Powell said the central bank should ‘assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness’. The second round of stress tests will be conducted this Wednesday where we should get an idea of the size of dividends and share buybacks expected from these US banks .

Staying with the US, economic data releases continued to disappoint with June preliminary PMI forecasts, for example, missing expectations. This week there are a number of key economic data releases including the Chicago Fed National Activity Index print for May; expected at 0.2 from 0.49 previously. This will be followed by the final Q1’17 GDP qoq and Core PCE qoq releases. The week, and month, will end with Fed’s favoured inflation indicator, the PCE core, which is expected to come at 0% mom and 1.4% yoy. Should be interesting to hear what Fed members have to say about the expected softer numbers ahead of the releases.

Elsewhere, MSCI Inc. announced China A-shares inclusion in its world renowned MSCI Emerging Markets Index, from June 2018. Although China will initially represent a modest ~0.73% weight within the indices - this is expected to grow - it is another stride on the road to internationalising the renminbi and integrating China further into the global financial system. Last week was a pretty quiet one on the data front in China, this week will see the industrial profits released for May, on Tuesday and official and Caixin PMI prints at the end of the week.

The Weekly Update

The main focus last week was on the FOMC meeting, where as widely expected the Fed increased rates by 25bps to 1%-1.25%. As markets had been expecting a hike since March, they were more focused on the future trajectory of hikes and of course the balance sheet taper details. Some further details were given on the USD 4.5tn balance sheet, with the Fed’s ‘caps’ for the monthly portfolio run-off to be set at $6bn in Treasuries and $4bn in MBS. A number of Fed officials have said the run-off programme could run until the balance sheet shrinks to USD 2-2.5tn; bear in mind the pre-financial crisis balance sheet stood at a ‘mere’ USD 800bn. No official start date was mentioned however the market expects a September announcement with Fed Chair Yellen, stating the plan could be implemented 'relatively soon'. On the rate path, the majority of Fed members have forecast one more rate hike this year.

With benign US inflation still on everyone’s minds, the central bank noted the recent decline and revised its core PCE forecasts lower to 1.7% (from 1.9%) adding however, that it will not let data ‘noise’ prevent it from continuing on its course of normalisation. Data noise did however impact the market ahead of the FOMC meeting; weak retail sales readings in May and the disappointing CPI releases for example saw the 10-year UST yield fall to year lows of 2.10%. The broadly hawkish post-hike Fed tone did see yields drift slightly higher, but the week ended with weak housing data and the largest drop in the Michigan consumer confidence since October 2016, coupled with dovish inflation comments from Fed members Kashkari and Kaplan, resulting in lower UST yields; the benchmark 10-year ended the week 5bps lower at 2.15%. A less data heavy week ahead sees the release of Q1’17 current account balance later today, existing home sales for May on Wednesday, followed by Markit PMI data on Friday. There will also be a number of Fed members speaking this week; markets will be looking for any further clues on the balance sheet normalisation program and indications for a September hike.

Meanwhile, China data for May was released broadly in-line with market expectations; retail sales, for example, was up 10.7% yoy in May and FDI. The IMF upgraded its growth forecast for China to 6.7% for this year and 6.4% until 2020 highlighting that the country’s current stable growth gives policymakers room to press on with economic reform, adding that ‘some near-term risks had receded’. As the Chinese economy remains stable and FX reserves have increased, Beijing announced that its holdings of US Treasury securities have risen to a six-month high. With the renminbi maintaining stability against the recent volatile dollar, coupled with Beijing's push to deleverage, the PBoC did not move to lift OMO rates in-line with the the Fed move. Looking ahead this week, there is not much in the way of key economic data, however, investors will be focused on the MSCI decision on Tuesday where the index provider will announce whether or not it will be including China’s USD 7tn A-Shares within its emerging market stock index.

Elsewhere, Qatari bond yields ended the week slightly lower, as there was no material change to the Qatar-Gulf diplomatic dispute; the longer-end of the yield curve is roughly 3 points higher from June-lows. Although the news flow is limited, the general feeling is that a negotiated settlement, lead by Kuwaiti leaders, is best for all parties. Over the weekend Qatar also stated that it will keep pumping gas to the UAE ‘ who are considered like brothers’.

With the data light week ahead, events such as the commencement of Brexit negotiations, today, and the Queen’s speech on Wednesday, will dominate market focus. Also as mentioned MSCI is due to consider China, and Saudi Arabia, South Korea and Argentina for inclusion in its Emerging Market Index, the latter three being on a watch list. As the index is considered the most ‘important index provider’, any decision made regarding the former countries will no doubt have a huge impact on their stock markets.

The Weekly Update

Last week market focus was dominated by the unfolding events in the Middle East; where Bahrain and Saudi Arabia, and subsequently UAE and Egypt abruptly cut diplomatic ties with Qatar; alleging links with “terrorism and extremism”, and Iran. Oman and Kuwait, other members of the GCC remained neutral; with Kuwait leading mediation talks. Donald Trump also offered up Rex Tillerson to aid in the negotiation process; Tillerson has past experience within the Gulf region having dealt with the likes of Saudi Arabia as former CEO to Exxon Mobil. Mid-week, S&P moved to downgrade Qatar’s rating one notch to Aa3 (negative), bring it in-line Moody’s Aa3 rating. Fitch has maintained its AA (stable) rating suggesting that it is too early to see the true impact, if any, on the Emirate’s strong economy, stating the sovereign's ‘net foreign assets worth over 200 per cent of GDP mean that the sovereign credit profile is highly resilient to external shocks. As the situation evolves, our assessment will focus on effects on the sovereign's external and fiscal deficits’.

Qatar sovereign and quasi-sovereign bonds were roughly 10-25bps wider in spread over the week; so a lot more resilient than most market makers ha expected. This was partially offset by the gains in Saudi government and government-owned entities we hold. We will continue to monitor the situation this week, however, for the moment we are neither looking to buy nor sell out of Qatari holdings, instead maintaining positions with up to 4 credit notches protection, thus offering an attractive spread over similar bonds. With no new developments over the weekend, Qatar bonds have traded up so far today (at time of writing).

Elsewhere, former FBI Director Comey’s testimony was pretty much a non-event in the US; the dollar gathered steam into the end of the week, gaining 0.58% (DXY Index), but still close to pre-election low levels, and 10-year US Treasury yields nudged up 4bps over the week, to 2.20%. This week will see the release of the May monthly budget statement, where expectations are for a USD 87bn deficit. PPI and CPI readings will be released on Wednesday, CPI expectations stand at 0% mom thus 2% yoy, down from 2.2% previously. Retail sales data will also be of some interest; the control group reading (a component of GDP calculations) is expected to come in at 0.3%, up from 0.2% in April. The all important FOMC meeting follows, where we expect the Fed will move to tighten by 25bps, taking rates to 1%-1.25%; still historically low levels. The Fed is also expected to announce its plans on shrinking its balance sheet, to commence in September, and update economic and financial projections; core inflation for example may be revised lower.  Finally, the end of the week will see a number of economic data prints, with the likes of housing starts, building permits, University of Michigan sentiment, and Empire Manufacturing for June, which is expected to come in at 5, from -1 previously.

In Europe, the ECB upgraded eurozone growth forecasts and kept rates on hold. Meanwhile, the UK elections were of much market focus into the second half of the week; the conservative party lost a number of seats and parliament ‘hung’ in the balance. The week ended with the announcement that the UK Conservative party reached a deal with Northern Ireland’s Democratic Unionist Party (DUP) for Theresa May to remain as PM and proceed with Brexit negotiations which are expected to be ‘softer’. Sterling swung around on Friday, falling as low as 1.2636 against the dollar intra-day, eventually settling at 1.2746 against the dollar, 1.10% lower on the week.

This week will see a continuation of CPI and PPI, and trade date across the UK and Europe, EC employment releases for April will also be of some interest. No doubt eyes will remain on the developments within the UK government. Theresa May will today come face to face at a gathering with her 1922 committee of  backbenchers; a meeting which was brought forward a day. A number of reports have come out over the weekend and this morning suggesting May could be overthrown and replaced; George Osborne claims May is a ‘dead woman walking’, while David Davis and former Tory leader, Michael Howard have expressed the need for stability and togetherness stating May is the right person to continue the Brexit negotiations.

Away from politics, economic data releases from China were broadly positive. FX reserves beat market expectations, and remained above the USD 3tn level; as a result Beijing announced an increase in US Treasury holdings. Trade data beat expectations, with imports and exports up from April. Inflation numbers also came in pretty much in line with the market consensus, with for example CPI 1.5% yoy up from 1.2% previously. This coming week is a relatively quiet one for China data with the main feature being retail sales, which is expected to come in unchanged from April at 10.7% yoy.

The Weekly Update

Another positive week for credit saw the yield on the 10-year UST fall over 8bps after US employment data broadly surprised to the downside; in fact the benchmark Treasury fell to its lowest level this year. The non-farm payroll reading was released at +138K, with a net revision over the last two months of -66K; so much weaker than expected headline numbers for economic bulls. The unemployment rate fell to 4.3%, due to the participation rate dropping to 62.7% from 62.9%, and average hourly earnings were released at 0.2% equating to 2.5% yoy, below expectations. The dollar remained on the back foot last week, the DXY Index fell 0.75%; the greenback is now trading down at levels last witnessed in October last year.

We think the Fed will still tighten this month despite the broader disappointing economic data prints, however, this does question the future outlook, as the Fed, have both the funds rate and balance sheet situation to contend with; too much activity on either or both could be recessionary. Markets will be watching US data releases keenly this week: with the likes of Nonfarm productivity, factory orders and Markit PMIs on Monday; market expectations are for no change to the services reading, at 54. Tuesday sees the JOLTS job openings with consumer credit for April out on Wednesday. Markets will be listening closely to Comey’s testimony on Thursday, with initial jobless claims the only key data release, and Friday will see April’s wholesale inventory release.

Elsewhere the renminbi had a very positive weak, gaining 0.67% (spot) against the dollar; year to date the onshore currency (CNY) is up 4.23% while the offshore renminbi (CNH) has gained 5.10%, on a total return basis. Last week witnessed incredible funding pressures in the CNH arena with short rates hitting ~43% in HIBOR, the Hong Kong equivalent to LIBOR, on Thursday. As these rates are higher than US rates renminbi investors get paid to buy and own the currency forward - the amount fluctuates with interest rate movements. That’s not to say one would get paid 42% for the month, however, the further along the yield curve you go the wider it gets. We took advantage of this across the Renminbi strategy by actively managing the the renminbi overlay. We extended in total 75% of our overlay, out along the curve selling our shorter dated positions and buying longer term positions; out to 45 days to lock in this funding pressure. On average the strategy locked in a pick-up of between 4.6% and 5.1%, annualised for the term of the position.

This week opens with global services PMIs; we woke up to China’s strong Caixin PMI release, up at 52.8. China’s foreign reserve reading this week will be of some interest also, with markets expecting a pick-up to USD 3.048bn. Elsewhere, we heard of the atrocious London Terror attacks over the weekend, this comes ahead of the UK elections this coming Thursday; the polls remain very split. Also on Thursday we will hear from the ECB, and the Q1’17 GDP reading for the euro area will also be of some interest.

The Weekly Update

Last week market focus was dominated by geopolitical tensions in the US and Brazil. President Trump did not have an easy week after former FBI director James Comey (who was previously sacked by the US President) alleged in a memo that Trump attempted to obstruct a federal investigation into the former National Security Advisor, Michael Flynn. This sent risk markets screeching to a halt, further exacerbated by media reports suggesting Trump could/should be impeached. Some semblance of normality followed the knee-jerk reactions, and the appointment of Former FBI Director, Robert Mueller to act as special counsel to investigate Russia’s involvement in the US elections eased market concerns somewhat.

The DXY (dollar) Index did however retreat further over the week, falling 2.10%, and the Treasury market benefited from the risk-off tone, with the yield on the 10-year falling over 9bps to 2.24%. Markets will focus on Trump's first presidential foreign trip which started in Saudi Arabia over the weekend; where counterterrorism measures and USD 110bn worth of arms deals (amongst other policies) were discussed. He is off to Israel today, followed by Italy and the Vatican, eventually headed to NATO and the G7 summit in Sicily later this week.

Meanwhile, the Fed reiterated that it will be ignoring current political noise and recent market volatility and is due to stay on course to raise rates twice this year. Cleveland Fed President, Loretta Mester commented that one must ‘look through those temporary fluctuations in both economic and financial data and focus on… the medium-term outlook’, adding the Fed should ‘remain very vigilant against falling behind, especially  given the low level of interest rates and the large size of our balance sheet’. Meanwhile St. Louis Fed chief, who is forecasting only one further rate hike over the next couple years, said he feels the Fed is ‘overly aggressive relative to actual incoming data on U.S. macroeconomic performance’ , which he sees as ‘relatively weak’. Once again the Fed remain split regarding the tightening cycle; we expect the USD 4.5tn balance sheet will come into play as a further tightening tool. We wonder whether there will be any further enlightenment with a steady stream of Fed members speaking today and tomorrow. A rate hike next month remains firmly in place; despite spikes in volatility through last week which saw the futures market price all number of probabilities for a Fed hike in June.

Markets across Brazil also had a tumultuous week; as corruption allegations and impeachment calls against President Michel Temer mounted. The country’s stock market plummeted a massive 8.8% on Thursday and the Brazilian real witnessed its largest drop since 1999, falling over 7%. Brazil’s 5-year CDS over ~20% over the week as a result, to ~250bps. To add some context, Russia’s 5-yr CDS ended the week trading at 152bps.  Having never favoured Brazil issuers amongst our portfolios, regular readers of our daily comments will recall our concerns over the country’s Petroleum company, Petrobras being highlighted on Tuesday. Rated sub-investment grade, we calculate the company's bonds have been trading ‘expensively’ for some time, and continue to do so despite the massive 5-7 point slide on Thursday.

Elsewhere, China’s economic data prints came in pretty much in-line with expectations and the offshore renminbi gained 0.35% against the dollar over the week, on a spot basis. The currency is now up +3.4% against the dollar year to date, on a total return basis. Meanwhile, on Tuesday the central bank along with the Hong Kong Monetary Authority announced plans to establish the ‘China-Hong Kong Bond Connect’, which would create a platform of access between the two nations’ bond markets. Bond connect would allow investors access to China’s government bonds without a quota or other technical hurdles. Whilst it is unusual for international investors to access a bond market in this way (usually bonds are traded OTC) it does make access easier, thus a positive.

The opening of the Chinese bond market is still at a very early stage given that international investors represent a tiny fraction of the overall market. International investors will inevitably hold more RMB assets in due course, and it's important for international investors to be able to access investments with renminbi exposure if the renminbi is going to be widely accepted as a major reserve currency, which we think it should. Initially the focus will be on northbound flows, but eventually it would seem that southbound flows will be allowed as well. That opens up an interesting possibility for domestic Chinese investors looking for other RMB instruments elsewhere, perhaps CGB futures in HK, for example.

Bond Connect is just one of many initiatives that will help the internationalisation of the RMB. At the moment though, internationalisation of the renminbi is hindered by the perception of investors that the renminbi has been weakening. However that perception is largely incorrect with CNH gaining over 10% against the euro and 15% against sterling over the past 3 years with 5% and 12% gains against those two currencies over 5 years for example. The renminbi has fallen against the US dollar but in reality, it's the dollar that has been strong rather than the renminbi being weak. This perception, even if it's not true, does reduce the appetite of foreign investors to hold renminbi assets. That attitude will change at some point and inbound capital will likely pick up from the very depressed levels that we see today.  

Looking forward to the week ahead, with relatively light US economic data last week, this week will see the release of the much watched Chicago Fed National Activity Index, PMI data, Q1’17 GDP reading, which is expected to come at 2.3%, and the Fed’s favoured inflation number, the core PCE print. Elsewhere in Europe we will see the release of the German IFO print, Eurozone flash PMI reading and the second estimate of UK Q1’17 GDP. Japan’s CPI reading will be of much interest at the end of the week, where market calls are for +0.4% (from 0.2% previously).

The Weekly Update

Further weakness was seen Friday in the US economic data as both Retail sales and the CPI index came in lower-than-expected although previous revisions offset somewhat. This caused US Treasury yields to finish the week around 6bp lower from last Monday’s level and moved the futures market to drop below 80% for a June 14th Fed rate hike, still very much odd’s on. This week we have limited data in the US with Empire Manufacturing today and Capacity Utilisation (CU), Industrial production (IP) along with housing starts tomorrow and the Phili Fed and Leading index on Thursday. Not much to impact markets with IP the focus. Of course we do have a number of Fed members speaking which is always of interest and watch out for any cyber-attacks coming across Twitter from the President of the United States.

The EU is also rather lacklustre in terms of economic evidence this coming week, with just Italian CPI and Greece GDP today, focus will be on tomorrow with the UK’s RPI, CPI and PPI releases as well as EC trade, Germany’s ZEW, French CPI and Italian GDP. Wednesday EU CPI data, UK unemployment and Italian trade are the highlights and Thursday French unemployment and UK Retail sales may be of interest. We close the week looking at Germany’s PPI and the ECB’s Current account.

Overnight we had Chinese IP for April at 6.5% YoY, lower than the 7% expected we also had Retail sales at 10.7% YoY, a tad weaker than expectations. We also had Japanese PPI coming in at 0.2% against -0.1% and Thai GDP YoY at 3.3% better than the 3.1% expected. Tomorrow the RBA minutes from their May meeting will be watched as the statement after the meeting was slightly more upbeat than those of April, we also have New Zealand’s PPI data and Japan's Tertiary Industry Index to contend with. Wednesday the attention will be with Japan as Machinery orders, CU and IP take centre stage although Aussie wages and Malay CPI are also on the agenda. Thursday Japan's GDP and Foreign bond buying data, Australian unemployment and New Zealand consumer confidence lead into Friday and Philippine and Malaysian GDP close the Asian week.

Latam is also looking at a quiet week with Mexican International reserves Tuesday, Chilean GDP Thursday and Colombian GDP Friday.

More of interest could be Russia where we get CPI, GDP and the intriguing Gold and Forex reserve data which is expected to continue to move higher. The last release was at $398.8 billion with the recent low, April 2015 at $350.5 billion, way below the $520 billion levels seen in 2013 before the fall during 2014 of around $132 billion. We know the Russian central bank is active in the Forex market adding to their foreign currency as the oil price has stabilised above $50 making Russia’s production profitable again. They also have one eye on the Ruble which is trading around 57 to the US dollar. You may recall Russia effectively devalued the Ruble during the oil weakness of 2014/2015 pushing it down from the USD 34.00 level to as weak as 82.00 in early 2016, so the move to today’s level is a 32% Ruble strengthening from the lows which means the oil revenue in US dollars buys far less Rubles to pay the production costs; this warrants monitoring especially if you are a Russian central banker sitting under President Putin’s gaze.
 

The Weekly Update

We enter the week with the markets calm after the win in France for Macron with a lead of over 20%, more than expected. Market reaction is limited with the Euro up slightly and French government bonds stable as movement over the last couple of weeks had already priced in the result. Elsewhere news that Russia will extend output cuts in agreement with OPEC has supported oil and a third monthly rise in China’s reserves up to $3.0295 trillion helped calm Asian forex markets.

This week the US data, a typical post Non-Farm Payrolls week, is skewed to the end of the week with PPI on Thursday and CPI and Retail sales on Friday, but we do have a number of Fed speakers throughout the week to catch the headlines as well as Mr Trump and his twitter account to contend with.

Europe has a little more action with German factory orders just announced up 1% with calls of 0.7%. Tomorrow we get German IP and Trade data as well as Italian Retail sales followed Wednesday by French and Italian IP. Thursday is the UK’s turn with the BOE announcement, expect sharply unchanged, IP, Trade and construction output. We also have the EC Commission’s Economic Forecasts but these are hardly ever mentioned let alone have an impact. Which brings us to Friday once more and German GDP and CPI, EC IP, Spanish CPI and French Non-Farm Payrolls, which may get a mention in Paris but markets hardly take notice of.

In Asia, as mentioned above, China’s reserves are up again as the trade surplus came in at $38.05 billion almost $3 billion higher than the calls while in Australia Building Approvals came in a disastrous -13.4% m-o-m but the NAB business confidence remained stable. Tuesday we have Aussie retail sales to add to the picture but the rest of the week is about Japan with official reserves and the leading index Wednesday and Trade on Thursday although we do have Singapore’s Retail sales on Friday for those who care.

Latam dominant data starts with Chilean CPI and Trade later today followed by Mexican CPI tomorrow and IP on Friday. In the middle we have Brazilian retail sales on Thursday to observe. We still don’t hold Brazilian bonds as they continue to trade rather expensive given the credit rating, but we do have sizeable positions in Mexico through the quasi sovereign Pemex and indeed the Government bonds, all denominated in US dollars. These assets have performed very well this year so far. By way of as an example the Pemex 5.5% maturing June 2044 is up in price 5.5 points since year end and at a spread of 344bp remains a long way over the fair value spread of 160bp for this Baa1 rated credit. In fact if this bond moved to fair value it would rally a further 26 points in price.
 

The Weekly Update

As we start the week the market is digesting the results of the first round of the French Presidential Election which saw Emmanuel Macron and Marine Le Pen advance to the final round run-off on 7th May.  Macron is expected to win given he has now received the backing of François Fillon the Republican candidate and Benoît Hamon the Socialist candidate.  The euro has been the obvious beneficiary of the result and asset markets generally are trading with more of a risk-on bias during Monday morning trading. The 10-year OAT has rallied and the yield is trading 0.84% (at the time of writing) with the spread over bunds having tightened to ~50 bps. That said the French parliamentary elections will follow shortly in June and neither Macron or Le Pen have well established parties (in terms of number of parliamentary seats) so it remains to be seen whether the next President can win/secure support from enough seats to be able to effectively implement their policy agenda.

The ECB meeting later in the week will be a focus as investors look for signs of stimulus withdrawal from the ECB; monthly asset purchases have been cut back to €60bn from April 2017. The Eurozone April CPI flash estimate is also due on Friday which will be closely monitored: in February the reading ticked up above 2 percent although it retraced to 1.5 percent in March. The BoJ is the other central bank due to meet this week.

France, Spain, the US and UK are also due to release Q1 GDP data later in the week.  Consensus estimates expect the US economy to grow at 1.1 percent in Q1 2017 down from 2.1 percent growth in Q4. This is a big week for US corporate earnings with some of the big names such as Exxon, and Microsoft reporting. President Trump has also been on the news wires talking about some tax announcements being made but it remains to be seen if much in the way of detail is forthcoming. Hence this week is shaping up to be more eventful than last week.

The key event of the last week was Theresa May’s volte face surprising the market with a UK general election on June 8 and stating how the division in Westminster ‘risks our ability to make a success of Brexit’. This gave sterling a nice boost, until a disappointing set of retail sales numbers were announced on Friday. March retail sales ex auto fuel were particularly weak falling 1.5% mom and falling 1.4% over the first quarter which will fuel concerns about the negative impact of Brexit. The ONS noted that retail sales have made a negative contribution to economic growth for the first time since 2010. Ironically, this follows the IMF’s upward revision to its UK growth forecast earlier in the week: it forecasts that the UK economy will grow by 2% in 2017 and noted growth ‘remained solid in the UK, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union’.

Along with the upbeat message on the UK economy the IMF also viewed the global economy with a more bullish look. Now it expects world growth to be 3.5% in 2017 and 3.6% in 2018. However they warned there may be dark clouds on the horizon. As Maurice Obstfeld, the IMF’s economic counsellor observed that ‘The global economy seems to be gaining momentum, we could be at a turning point’ but cautioned ‘even as things look up, the post–world war two system of international economic relations is under severe strain despite the aggregate benefits it has delivered – and precisely because growth and the resulting economic adjustments have too often entailed unequal rewards and costs within countries’, adding that ‘One salient threat is a turn toward protectionism, leading to trade warfare. Mainly in advanced economies, several factors – lower growth since the 2010–’11 recovery from the global financial crisis, even slower growth of median incomes, and structural labour-market disruptions – have generated political support for zero-sum policy approaches that could undermine international trading relationships, along with multilateral cooperation more generally’.

The IMF listed protectionism as one of 6 downside risks to the global economy, with others including an aggressive rolling-back of financial regulation leading to excessive risk-taking and faster than expected interest rate increases in the UK leading to financial market disruption.  However, by far the biggest concern is protectionism, with Obstfeld predicting that ‘Capitulating to those pressures would result in a self-inflicted wound, leading to higher prices for consumers and businesses, lower productivity, and therefore, lower overall real income for households’.

The Weekly Update

This week is all about inflation with the UK leading with CPI, PPI, and RPI on Tuesday plus the German ZEW report and Eurozone Industrial Production followed by US PPI and CPI and Europe wide CPI data Thursday and Friday. So focus in the West will be on comments from the Fed and European central bankers.

In Asia we have a mass of Japanese data including trade, machine orders, industrial production, M2 and the report on foreign bond flows by Japanese investors and in China money supply, trade and CPI/PPI. We also have the Reserve Bank of Australia’s financial stability review to digest.

In Latin America, Mexico’s reserves will be of interest to the currency players as well as industrial production and the central bank minutes, and in Brazil we have a Selic rate fixing with expectations of 11.25% from 12.25% and retail sales to contend with, broadly a quiet week for data globally.

After a 12 year ban on new projects, Qatar Petroleum is to start a new natural gas project in the so-called North Field, Southern section, which they expect to have capacity of 2 billion cubic feet per day, which is the equivalent of 400,000 barrels of oil a day; this should come on-stream in around five years’ time.

One of the companies that should benefit from this new production is Nakilat (Qatar Gas Transportation Company) which has the largest LNG fleet in the world, mostly owned outright, but sometimes in joint ventures, with 67 LNG tankers and 4 LPG vessels.

We have positions in two bonds issued by Nakilat both maturing in 2033 and both have a scheduled sinking structure, that is they gradually get redeemed by a scheduled amount each coupon payment date up to maturity. One of the bonds has already been sinking, since 2010, while the other is due to start in 2021. As these are both scheduled amortisations we need to look at the average life to assess value so slightly more involved, as the calculation to determine ‘fair value’ needs to build in the extra cash you receive in addition to the coupon flow prior to the maturity date. Broadly, you have an extra payment, from principal, to reinvest as well as your regular coupon and so more compounding to take into hand.

Basically, these two bonds are cheap as a number of investors and their systems do not cope very well with this structure. Both bonds are rated but one is 1st Lien and the other 2nd Lien, a difference in the rating of one credit notch Aa3 verses A1. But both according to our Relative Value Model (RVM) are around 5 credit notches cheap and offer a return and yield of close to 12.5%.

The US housing market is a $26tn asset class, larger than the US stock market. Whereas the stock market and certain property hotspots have rallied in recent years, US house prices on average have stalled for the past 3 years. Alongside the rise in overall household debts, it’s worth noting that mortgage delinquencies also spiked up dramatically at the end of 2016 after six years of steady decline (mortgage delinquencies and defaults continued to rise for a couple of years following the Global Financial Crisis). These were a leading indicator of the 2008 market crash and were trending upwards from early 2006. In the 4th quarter of 2016 US prime mortgage delinquencies jumped from 2.6% to 3.1% of loans.

Since the peak of 7.3% in early 2010 there have only been a couple of modest single-quarter spikes in delinquencies, none as large as the latest, and all reverting downwards again in the following quarter. Given that we are close to recent historical average levels (~2.5% in the decade preceding the crisis) this may just be a fluctuation and future readings will not drift that far from current levels. But given the high levels of total household debt and the expected rise in rates and potential living costs it is also possible that we will see more households struggling to make mortgage payments on-time (even if these don’t rise due to typically fixed rates).

The Weekly Update

The big number this week is of course US Non-Farm Payrolls on Friday with +175k expected for the headline number, a stable 4.7% unemployment rate, and a small increase in average hourly earnings to 0.3% from 0.2% previously which is an actual decrease in the year-on-year rate of 2.7% from 2.8%. We also have minutes from the FOMC and ECB on Wednesday and Thursday. Across the globe we have the PMI numbers with Europe starting today along with the US manufacturing number, ending with the week with China’s and India’s on Thursday. Other data includes US Durable goods and European retail sales.

In Asia we have a few holidays as China has ‘tomb sweeping’ today and Hong Kong has a day out tomorrow. Japan released their Tankan this morning which showed some improvement of small and large manufacturers, and Friday we have a mass of Asian central banks announcing their reserves.

In Latam Brazil’s inflation numbers and Industrial production could be of interest as will be México’s CPI and Leading Index but as usual their relative currency swings may be the focus for the market.

Of course the Trump / Xi meeting will be of interest Thursday and Friday and we expect more of the same from FOMC speakers as they all seem to be talking from the same hymn sheet at the moment to a lesser or slightly more aggressive degree. ECB president Draghi is also speaking in Frankfurt which will be eagerly awaited for any further clues on his tapering plans.

In our bonds we would expect relative calm until we see Friday’s NFP report although we still need to keep one eye on the US stock market. Friday will give us more insight into how the economy is ending the 1st quarter and will set the tone for the coming week or so with the market maintaining a much lower trajectory for rate increases, which we agree with, than the FED’s own ‘dot plot path’.

The Green Bond market has really taken off over the past couple years and according to Moody’s just last year the market rose 120%; boosted by Chinese issuers, particularly Chinese banks, in their fight to reduce pollution across the country. Issued with an intention to fund environmental projects, corporates, banks and supranationals have been issuing these tax-exempt bonds, which now account for over USD 200bn total issuance; although still a tiny proportion (~1.5%) of total global debt to plough into climate changing projects; if we consider the growing impetus of the Paris Agreement.

Last week the National Bank of Abu Dhabi (NBAD), Abu Dhabi’s largest lending bank and the UAE’s second largest, issued the GCC’s first ever ‘Green Bond’. Abu Dhabi holds ~6% of the world's oil reserves, and its hydrocarbon industry generates ~80% of the government's revenues and accounts for over half of the nation's GDP. The government has therefore taken steps since 2015 to diversify the economy away from the hydrocarbon complex into lending, investing and facilitating renewable energy projects ‘focused on environmentally sustainable activities’, NBAD said. According to the head of sustainable business banking at NBAD, Nathan Weatherstone, there is ‘approximately $640bn of investment required for renewable energy projects across the West-East Corridor’. The new NBAD 5-year USD 587m Green deal is just a drop in the ocean, but a step towards achieving a goal of reducing oil energy reliance.

Rated Aa3, just one notch below that of the Emirate, the 3% 2022 bond was issued at a spread of 109.10bps over Treasuries, we calculated that the expected return, if the bond were to reach fair value would be 2.2%, with a yield just under 3% and ~3 notches of spread cushion. According to sources, the deal was just under 2x oversubscribed, with Middle Eastern banks and funds accounting for ~27% of the issue; while European institutions bagged 50% of the deal. We did not enter into the deal as we have chosen not to hold GCC banks for the time being, and we feel better value lies with, for example China’s state-owned oil company CNOOC’s bonds. The CNOOC 3.8775% 2022 issue currently trades ~55 bps over what we deem is fair value for similar bonds, this implies an expected return and yield of 5.5% for the Aa3 rated issue, which is comfortably over 3 credit notches cheap.

On Wednesday last week, after 9 months of waiting, the Brexit referendum has finally given birth to Article 50. In a sign of the times, the President of the European Council Donald Tusk notified the world of his receipt of the official letter via twitter a few minutes before 12:30 GMT. Prime Minister Theresa May then addressed the House of Commons calling the occasion a ‘great turning points in Britain’s history’; meanwhile Tusk opened his address stating ‘There is no reason to pretend this is a happy day, neither in Brussels nor in London,’ and concluded with ‘we already miss you’. The letter and accompanying speech remained clear in pursuing a hard Brexit, stating ‘Because European Leaders have said many times that we cannot ‘cherry pick’ and remain members of the Single Market without accepting the four freedoms that are indivisible. We respect that position. And as accepting those freedoms is incompatible with the democratically expressed will of the British People, we will no longer be members of the Single Market.’

Anecdotally the pen used to sign the agreement was a Parker Duofold: from a US company that used to manufacture in the UK but moved production to France in 2011. One hopes this is not a portent of Brexit causing other UK businesses to go the same way. The only real unambiguous consequence of today is that it is indeed a “historic moment from which there can be no turning back”. In two years we will begin to see whether this new uphill struggle leads the UK to the new heights of “A Truly Global Britain” or straight off a precipice.

The Weekly Update

Last week the yield on the 10-year US Treasury fell 9bps to 2.41%, mostly driven by Trump’s abandonment of the health care bill vote. In fact Trump-euphoria appeared to wane ahead of the AHCA vote, as the GOP are not in favour of replacing Obamacare; as such the dollar continued its retreat, with the DXY Index falling 0.67% over the week, back below $100 level as markets have been forced to rethink their pricing.

If we look back a few months ago Trump was the engine of economic and market change, and the markets consequently priced bond yields higher along with a stronger stock market. However, as we have argued a number of times Trump will have a problem with getting his reforms passed through the house. From our viewpoint Americans have voted for change and Trump appears to be just the change, however his appointments to key positions in his administration from the corporate sector is a big mistake. We have argued that 10-year bond yields above 2.5% is a buying opportunity and the stock market is very toppy, with an optimistic bias as the market assumes Trump will be able to effect some economy positive factors. However, we doubt the political situation will permit much change as politicians can always hide behind the huge budget deficit, when in fact they are going to force Trump into a box of frustration to teach him the political club really runs the USA. As expectations for future reform continue to hang in the balance, markets will look to focus on the outcome of the upcoming  tax overhaul bill.

Elsewhere, the UK is to trigger Article 50 on Mar 29th, this week Wednesday, while the Scottish debate on a second independence referendum will take place on Tuesday. Rating agency Moody’s highlights: ‘The credit implications of Brexit are likely to remain modest and manageable for most UK issuers in our base case scenario. This implies that rating implications may be limited for most UK-domiciled issuers’. Moody’s rates the UK Aa1, with negative outlook. With CPI surprising on the upside last week, up 2.3% in February, there has been some debate on whether rate normalisation should begin, however, with the huge unknowns surrounding Brexit negotiations, monetary policy is expected to remain unchanged in the short-term.

Elsewhere, ‘serial defaulter’ Argentina issued a 3.375% 2020 new issue, rated B3 by Moody’s; initially touted at CHF300m the deal was up-scaled to CHF400m. Despite Argentina being rated 4 stars on our NFA model this is not an issue we would look to hold. We have never held debt issued by Argentina mostly due to its past default history, the fact that it is rated sub-investment grade and has negative risk-adjusted expected returns, however, we always monitor the bond market. This was an interesting issue, as there was a huge amount of market demand with recent positive developments including: Moody’s recent rating outlook upgrade to positive from stable, and JP Morgan including Argentina in its EM local indices bucket. Argentina has always been a favourite with other investors as shown by the issues in April last year when they issued $16.5bn in new bonds with interest rumoured, at the time, to be in excess of $70bn.

Unfortunately we calculate that Argentina’s debt trades expensively, with the 7.625% 2046 trading at a spread around +450bps over USTs, where similar bonds trade at around 506bps over. This suggests that the market is actually pricing in further improvement and rating this particular B2 bond one notch higher, at B1. We have never held anything expensive on our portfolio, as this prices in more chance of a capital loss, in this case, over -6%. We would much rather hold USD debt issued by United Mexican States: where the A-/BBB+ rated 4.6% 2046 issue for example has an expected return and yield of over +14% and +2.2 credit notches of protection.

Looking to the week ahead there is little in the way of economic data releases from the US until Thursday, where we will get the third reading for Q4 growth and core PCE release. Of course Article 50 will take up European focus and we expect continued central bank comments throughout the week. In Asia, Japanese retail sales and CPI are due, but of more interest will be China’s PMI release on Friday. With little data and little scheduled central bank activity the markets should be relatively calm this week, but as always, look out for the unexpected.

The Weekly Update

Last week started with rumours that the UK would formally trigger the process of leaving the EU on Tuesday. However, before Theresa May’s government could trigger Article 50 she had to finish the legislation in parliament that gives her the right to do so. Although the government was given a relatively easy ride by parliament initially, with regards to triggering the process, it has since suffered 2 defeats in the House of Lords. The amendments, on whether parliament should have a vote on the final Brexit deal and a guaranteeing of the rights of EU nationals in the UK, were debated on Monday and sent back to the House of Lords, where they accepted the supremacy of the Commons. It has since been declared that the UK is to trigger the Brexit process on March 29th.

On Wednesday we had a clear case of ‘sell the rumour, buy the fact’, when the FOMC raised the Fed's funds rate target by 25bps sparking a rally across the US Treasury (UST), stock, emerging market forex, as well as Latam, Middle East and Far East bond markets. The rate hike was followed by a much more dovish Fed statement than was previously expected. In the post announcement press conference Fed Chair Janet Yellen stated, ’It is likely that target policy rates will go up in line with their forecast. As such we don’t expect any acceleration in the pace of hikes as long as economic developments remain on track, as a result, we maintain our monetary policy outlook, expecting two more hikes this year and two more next year’.

Of course the market remained sanguine regarding these further rate hikes, and continues, as it has over the last two years, to have lower rates priced in. If we look at the medium of the Fed's ‘dot plot’ path they have indicated Fed funds rates at 2.25% by year-end and 3% at the end of 2018, much higher than the OIS (Overnight Indexed Swap) priced by the market; which implies around 1.35% at the end of this year and just 1.75% at the end of 2018. Strikes us that if the Fed does enact two more hikes this year, consistent with their current path of just 25bp per move, that puts the higher band of the Funds rate at 1.5% not 2.25% as inferred by the ‘dot plot’ medium path and so this indicator looks to be an inaccurate measure given Yellen’s statement.

As mentioned above, UST rallied across the curve sparking a global bond rally with 5-year yields 13bps lower, now trading at around 2%, and 10-years 11bps lower, now trading around 2.5%. Basically, we have been saying the market was oversold coming into the meeting as 10-year UST yields had moved up around 20bps since February month-end and at this morning’s levels we now make UST rates at fair value given the economic and political outlook for the up-and-coming Trump budget etc. Broadly, we feel there is a risk premium already built into current pricing although we still see the longer-end of the yield curve as the best value, and with the highest potential return on a risk adjusted basis.

Elsewhere, Chinese economic data releases added impetus to the country's growth momentum. February’s industrial production (IP) release beat market expectations, accelerating 6.3%yoy; boosted by manufacturing and utility sectors. Fixed asset investment (FAI) also exceeded expectations coming in at 8.9%yoy, from 8.1%yoy in January. Meanwhile, retail sales fell short of the market consensus (although still stood at 9.5%yoy) driven by a fall in auto sales; this was possibly due to overbuying of cars in 2016 ahead of the reduction in tax incentives on low-emission cars this year.

The property sector, which has been somewhat of a concern, has also shown signs of moderate recovery with property investment gaining 2% to 8.9%yoy. According to China’s National Bureau of Statistics, third- and fourth-tier cities have benefited from the recent increase in property sales which is in-line with policymakers’ push to reduce inventory in the lower-tier cities: part of the five economic tasks of 2017.

Earlier this month at the National People's Congress (NPC) it was announced that China’s growth target was officially lowered to 6.5% (from 6.5-7%). With the recent bout of positive data prints, and all else being equal, we do not expect the economy will struggle to achieve this level of growth, and could in fact exceed it. However, the government would not want the economy to overheat, nor push for growth just so that a target can be achieved, rather continue on its path of more quality and sustainable growth while identifying and managing financial risks.

No doubt the growth rate will determine the monetary and fiscal policy mix. We expect policymakers to maintain a bias towards proactive fiscal policy, especially as monetary policy is constrained as the PBoC looks to stem capital outflows. The lowly 3% budget deficit as a percentage of GDP this year gives the government sufficient room to deploy all number of quasi-fiscal measures to maintain growth targets: if for example inflation spikes and the central bank has to tighten.