Last week stocks remained broadly flat with light trading as US 10-year Treasury yields rose 4bps (from 2.84% to 2.88%) and the dollar ended the week overall slightly weaker undoing its strength earlier in the week. Also earlier this week Fed Chair Jay Powell left markets guessing with just a couple of words of ad-libbing during his testimony to Congress, stating, “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that (for now) the best way forward is to keep gradually raising the federal funds rate.”
Markets witnessed a rollercoaster week as trade war concerns ramped up; the yield on the 10-year UST was marginally unchanged, although the curve continued to flatten. The US announced a further USD 200bn worth of Chinese imports on which it wishes to impose 10% tariffs; subject to public consultation by the end of August. Calling the new list of tariffs “totally unacceptable” bullying, China vowed once again to retaliate; with the US touting a total of USD 500bn worth of Chinese goods to be subject to tariffs, China may struggle to fight back with the same magnitude, as it only imports ~USD150bn from the United States. Fortunately, China has sufficient firepower to deploy to stabilise growth and the renminbi. The good news on Friday came from the strong trade report, where Chinese exports bounced more than expected and imports remained robust; suggesting both external in domestic demand remain strong. China’s trade surplus also beat expectations, almost doubling; its surplus with the US jumped to record highs, this could add further fuel to Trump’s trade agenda.
The dangerous consequence of the US administration’s decision to embark on this course of action is that it could easily lead to another financial collapse and world leaders will need to think quickly about how to avert this. A slowdown in consumer spending would likely go hand in hand with a slowdown in economic growth and investors are likely to respond by taking capital home. Creditor nations like Japan tend to see their currencies appreciate under those circumstances and whilst the euro faces difficult challenges with Brexit and the huge indebtedness of the periphery, the euro is likely to gain too. As those two currencies are major components of the RMB basket then the renminbi is likely to strengthen too. We believe that further escalation of the trade war by the Trump administration risks a slowdown in consumer spending and with the Fed still in tightening mode, creates the conditions under which the world suffers another global recession and an accompanying global financial crisis.
In terms of Fed rhetoric, Chair, Powell upbeat in regards to the US economy and inflation trajectory, however, warned of the effects to growth of aggressive trade policies. We will hear more from Powell on Tuesday as he presents his views on the US economy in front on Congress. Meanwhile, US Core CPI came in bang on forecast at 2.3% yoy. Headlines were focused on Trump’s travels and the latest NATO Summit where a “very happy” Trump held a press conference confirming he can now “believe in NATO” whose members have committed to “up spending [by] $33bn” with a commitment from a “very unified and much stronger” Alliance to swiftly meet the NATO 2% of GDP spending target. Agreeableness does not a dealmaker make.
This week kicked-off with China’s activity data, which remained robust in June and the Q2’18 GDP print came in-line with expectations at 6.7%; well above the ‘around 6.5%’ government target. Today Trump and Putin are holding their first summit, and China’s Premier Li will co-host the China-EU summit alongside EC President Tusk. Data wise the US will release its retail sales and Empire Manufacturing readings, and the US housing print may grab some attention. As mentioned Tuesday’s focus will be on Powell’s testimony. Brexit chatter and US IP may also garner some market attention. The US beige book and housing starts will be released on Wednesday, and Powell is due to appear in front of the House Financial Services Committee. On Thursday, the U.S. Commerce Department will begin its two day investigations into whether auto imports pose a threat to national security; following the touted 25% tariffs. UK retail sales release on Thursday will be watched closely as market expectations are for further softening in June. A relatively quiet day, will see the Japan CPI reading for June and the Fed’s Bullard speak on monetary policy and the US economy.
Another mixed week across asset classes saw the yield on the 10-year UST rally 4bps, to 2.82% while the dollar softened 0.54%. Meanwhile, Brent, fell 2.68% after Trump barked that OPEC must “reduce pricing now!”. The renminbi also came back into the spotlight following the recent trade sentiment driven downturn. Although the offshore renminbi was broadly lower against the dollar, it had recovered into the end of the week; we believe the weakness was overdone and expect stability to return and for the currency to strengthen over the long term. The PBoC stated that it is not willing to intervene in the fx market, adding that it will maintain liquidity at reasonable and sufficient levels and that deleveraging remains on track.
A mixed week across asset classes saw the yield on the 10-year close 4bps lower at 2.86%, and the UST curve flatten; the 2s30s spread narrowed further, partly due to a better-than-expected 30-year auction. Meanwhile, global stock markets suffered a sell-off, the dollar was relatively flat, while Brent bounced over 5% to almost $80pb. In terms of key data, the third reading for Q1’18 US GDP disappointed at 2% (from 2.2%) while the US PCE report surprised to the upside at 2%yoy in May. China’s official PMI readings over the weekend remained strong, with the services reading beating expectations.
Tit-for-tat trade rhetoric dominated market focus in what was a fairly light data week; we will continue to monitor developments and negotiations in the coming weeks with the US tariff deadline on China’s goods and services due on July, 6. US internet retailers came under pressure last week after the US Supreme Court ruled that states and local governments can start collecting currently uncharged taxes from sales made online. Closer to home, the BoE stayed pat on rates, however, appeared more hawkish with MPC member Haldane’s surprising switch from hold to hike; the probability for a hike in August spiked above 50% (to 69%) following the meeting. The central bank did note that the soft Q1’18 GDP reading was “temporary”, adding that employment remains strong.
Last week markets awaited the Trump-Kim summit in Singapore, which appeared to go through without a hitch; although nothing concrete was announced. There was some talk of denuclearisation and subsequent US sanction easing, with China also saying it may revise sanctions on the Peninsula. The next key event was the FOMC meeting where, as largely priced in, the Fed hiked rates by 25bps, to 1.75%-2.00%. There was a fairly muted market response following the end of a relatively more hawkish FOMC meeting; the yield curve flattened and the dollar tumbled, although this could have also resulted from the reignition of US-China trade tensions. Flight to safe assets into the week’s close saw the yield on the 10-year close at 2.92%, and the dollar gained 1.34%. The yield curve continued to flatten with the spread between the 2s30s falling to mid-2007 levels.
Last week saw UST yields rise 4.4bps, to touch 2.947%, whist Bunds increased 6.3bps, from 0.386% to 0.449%. Some of this move was a residual retracement of the flight to safety during the Italian one-day blowout but the relatively large move in European debt (Bund yields now more than 16% higher than where they were last week) was chiefly a result of a speech, from ECB Chief Economist, Peter Praet’s on their Asset Purchase Programme (APP) and breaking news that “Next week, the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of our net purchases”.
The main highlights last week were: the ongoing political crisis in Italy, and mounting trade tension concerns following the announcements of US tariffs. So a very mixed week across asset classes witnessed Italy’s yield curve sell-off aggressively, with the 2-year yields spiking as high as 2.84% on Tuesday, eventually settling at ~1% following the swearing in of the new (populist) government on Friday. Meanwhile, the yield on the UST 10-year was marginally lower over the week, at 2.9%. The dollar could not hold onto the early-week gains and was down marginally over the week.
A mixed week across markets saw yields across the UST curve spike; with the 10-year benchmark stabilising within 3% range, at 3.06%. The dollar held onto its weekly gain, and Brent peeked above $80pb intraday on Thursday; closing the week at $78.51pb, 1.8% higher. Meanwhile, equity markets endured a choppy week; the S&P Index eventually closed 0.54% lower.
Mixed Fed rhetoric grabbed market attention, with the likes of Atlanta’s Bostic, once again highlighting his concerns over possible yield curve inversion. The probability of a fourth rate hike this year (or three more) also shot up last week, however, remains below a 35% chance. The next hike is priced in for the central bank meeting next month, with the third (and currently final) rate rise expected in September.
The big news last week was Trump’s withdrawal from the Iran Nuclear Deal; after which he stated that any nations found promoting Iran’s nuclear capabilities will also be sanctioned. Oil endured a bumpy ride as a result through the week, with Brent eventually closing ~3% higher. Higher oil prices fuelled further inflation concerns, which saw UST yields drive back above 3%, however, broadly weaker CPI data prints saw the curve come off recent high yields; with the 10-year eventually closing the week relatively flat, at 2.97%.
Last week the 10-year UST climbed above the “psychological” 3% level and eventually rallied after Draghi’s dovish post-meeting Q&A tones; closing at 2.96%, flat over the week. The US dollar also had a positive week; the DXY Index gained 1.36%. The most closely watched event was the historic Korean summit which saw both leaders cross over each threshold holding hands; North Korea subsequently changed its time zone bringing it in line with South Korea, and stated its denuclearisation intentions. Elsewhere, UK’s economic data disappointed with CPI, growth and wage inflation all below expectations; adverse weather, which doesn’t appear to be shifting any time soon was to blame; expectations for a further tightening have been dampened.
A week of two halves saw the UST yield curve initially flatten, with the 2s30s spread tighten to 2007 pre-GFC levels, only to steepen marginally towards the end of the week following renewed inflation concerns off the back of a crude oil rally, and in anticipation of bumper UST issuance this coming week. Several newswires commented on the inverted yield curve concerns, thus recession fears; we do not foresee a US recession on the immediate horizon, however, have not discounted the possibility in the medium- to long-term. As we have pointed out previously, historically, the UST curve has tended to flatten during tightening cycles, hence our bias towards high-quality, sovereign and quasi-sovereign, hard-currency bonds at the longer end.
Trade sentiment made a sharp u-turn last week, following the more conciliatory tones from China and the US, coupled with Trump announcing his wishes to re-join the TPP. Market focus therefore rapidly shifted to geopolitical tensions which ramped up off the back of the ongoing conflict in Syria; with the US-led trilateral airstrike following Friday's market close. UST 10-year yields ended the week up 5bps, to 2.83%. The DXY (dollar) Index couldn't hold above the 90 level, tumbling 0.34% last week. Also of note is the continued UST curve flattening, which saw the 2s10s spread to fall to decade lows by close last week. As regular readers are aware, we have favoured a bias toward the longer-end of the curve with a single A credit profile across all portfolios. Meanwhile, oil rallied off the back of highest geopolitical tensions; brent was up over 8% last week.
Trade tensions, the US employment dump and Powell’s address on Friday commanded market attention last week. China released a list of reciprocal 25% tariffs on US imports totalling USD 50bn, this followed the US’s $50bn tariff list covering over 1,300 Chinese products. It did appear that China’s quick response was a signal to the US that it will not sit back and be bullied but there was also no indication of when the tariffs would come due, allowing bilateral negotiations to continue. President Trump did tweet that there is no trade war with China, and Chinese authorities stated their openness to talks highlighting that “it takes two to tango”.
The main highlight last week was the well publicised and priced in 25bps rate hike, to 1.50-1.75%. The message for this year's outlook was fairly dovish, with still only three hikes priced in. As it was Jerome Powell’s first meeting as Fed Chair he did little to stir markets, reiterating a gradual and flexible approach to normalising rates, adding that there is little upside risk to inflation currently. The dollar took a tumble and US Treasuries rallied following the statement. Elsewhere, in response to the rate hike, the People’s Bank of China increased its money market rate by 5bps saying the move is “in line with market expectations and a normal reaction to the Fed’s rate hike”. The offshore renminbi gained 0.21% while the Japanese yen continued its appreciation gaining 1.21% against the greenback last week. Oil also closed 6.4% higher over the week, closing above $70pb (the highest level since mid-2015) following the appointment of John Bolton as US national security advisor; markets expect sanction tensions with Iran to be resurrected.
Last week, President Trump’s hiring and firing announcements featured heavily in the media, notably the nomination of CIA Director Mike Pompeo to replace Rex Tillerson as Secretary of State. Gina Haspel was confirmed as the nominee to replace Pompeo as the CIA Director and Larry Kudlow as the new director of the White House National Economic Council. At the end of the week, ex-FBI director Andrew McCabe also found himself fired. These events added to a sense of uncertainty and nervousness about the Trump administration’s policies, particularly after the imposition of tariffs on aluminium and steel.
Donald Trump continued to grab the headlines for much of the week first with more news on tariffs and then at the end of the week agreeing to meet with Kim Jong-Un in May. Trump officially went through with his “very flexible” 25% steel and 10% aluminium tariffs, highlighting regional allies, or as Trump refers, “real friends” Canada and Mexico as currently exempt. The tariffs, which will take effect in the next couple weeks could “go up or down, depending on the country”, with Trump adding that countries could be dropped and added. Potentially adding fuel to the fire, the US’s January trade deficit registered USD56.6bn up from a revised USD53.9bn in December and at the highest level since July 2008. The fallout from tariffs continued to build with the EU threatening to respond with its own set of tariffs. This clearly, added to investor nervousness about the negative repercussions of a trade war, particularly after the resignation of Trump’s economic advisor Gary Cohn.
Away from the ‘Beast of the East’, global politics and Mr Trump's steel and aluminium tariff announcement, new Fed Chair Jerome Powell’s testimonies and US PCE were the main features last week. Powell stated that the central bank believes the US economy is not overheating adding that wages do not appear to be causing any concerning upside risks yet. He reiterated that a gradual approach to rate hikes is still on the books, and the Fed will continue to manage the balance between targeted inflation and economic stability. Powell also highlighted the importance of the core PCE reading (as opposed to core CPI), as a “better indicator of future inflation”; the core PCE reading for January came in at 1.5% yoy so still well below the Fed’s 2% target. Other data out of the US was mixed, with the likes of new home sales, and durable and capital goods readings disappointing, while ISM prints bounced higher. Over the week, the yield on the 10-year UST was unchanged at 2.87% and the dollar was marginally higher. Meanwhile, the Japanese yen gained over 1% and the offshore renminbi was marginally lower against the dollar.
It was relatively quiet start to the week with the US out on Monday and China celebrating Lunar New Year. This was until Wednesday where we had a number of key data prints from the UK and EU, and the FOMC minutes: which appeared to highlight the upside risks to US inflation. The yield on the 10-year UST endured a rollercoaster ride through the week, eventually closing marginally lower at 2.87%, and the dollar found its feet once again, gaining 0.88%.
In terms of the UST moves, we note that longer-dated Treasuries have outperformed shorter-dated in the last five tightening cycles - with the natural effect of higher rates (in due course) dampening both inflation and economic growth. And with the long-run dot plot implied Fed Funds Target Rate still at a modest 2.75% it seems unlikely there would be enough lasting shifts in forecasts to push the longer-end of the Treasury curve much beyond its recent highs
Last week continued in the same vein as the previous one for bondholders, as January’s highly anticipated US CPI print surprised to the upside with the headline reading at 2.1% yoy and the core at 1.8%yoy. The weak retail sales readings were largely ignored by asset markets, so the knee-jerk sell-off across the Treasury curve followed the stronger inflation print. Also ignored was a pick up in PPI data, but a weak Empire Manufacturing release brought some respite to the UST curve; the yield on the 10-year eventually closed the week marginally higher at 2.88%. Meanwhile, despite a rally on Friday, the dollar remained on the back-foot over the week. Elsewhere, the offshore renminbi (CNH) continued to strengthen against the greenback closing below 6.30 and the Japanese yen rallied a further 2.44% against the dollar last week; helped by comments from Japan’s finance minister that no market intervention - to slow pace of appreciation - is required at this stage. Brent also enjoyed a bounce last week. The UAE Minister of Energy and Industry’s statement that the group of Emirates is “determined to pursue” Saudi’s efforts to stabilise oil markets over the weekend will no doubt support Brent at these levels.