The Weekly Update

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.

Going back to the inflation ‘hysteria’, we had expected a bounce at the beginning of the year, and still remain of the view that it is a short-term theme as there are several indicators (such as vehicle sales and mortgage delinquencies, for example), which paint a much more pessimistic view of the economy. However, the market has clearly reacted more than we had expected over the last several weeks, with the UST sell-off exacerbated by the high levels of funding. Just on that, this week will see USD 258bn worth of UST auctions; across short-term bills to 7-year maturities, so the shorter-end of the curve could come under pressure.

We do think the Fed will continue to tighten especially if we see inflation pick up further, and that along with their balance sheet management will combine to move us closer to the end of this cycle which is now in its 104th month of expansion. For the cycle to really start to turn we would need to see a prolonged or very sudden decline in equity markets, and until and unless that happens consumer confidence will likely remain relatively high. So, a difficult month for us so far on our long-only portfolios but we still believe that this is an inflationary blip, not a constant move higher in prices. We continue to monitor the situation daily.

Expect a relatively quiet day today as both US equity and bond markets are shut for President's Day, and China is out celebrating Lunar new year. Closer to home, EU finance ministers will decide on the next ECB VP and the Greece bailout will also be discussed. UK house price data could be of interest, as could Japan’s trade releases. Another quiet day on the data front will see Germany’s SPD begin a two-week session for members to vote on the coalition pact proposal, on Tuesday. Wednesday could breathe some life into markets as we receive what are expected to be more hawkish tones from the FOMC ‘s January minutes and the BOE’s inflation report. A number of EU flash PMIs could be of interest, along with UK jobs data. Thursday will kick-off with the Chinese markets opening the year of the dog, and later the preliminary Q4’17 UK GDP readings could garner some attention. Friday will see another quiet day in terms of data and activity, with the only key features being NY Fed Dudley’s discussion on the Fed’s balance sheet and the central bank’s semi-annual monetary policy report to Congress, and Japan’s CPI print. Watch out for a number of Fed speakers this week, we expect more hawkish rhetoric, but still a gradual approach to rate hikes.

The Weekly Update

Last week saw a sharp sell-off in equity indices across the board with both The Dow Jones Industrial Average and S&P 500 down over -5%, further to the -4% drop in the prior week. Resultantly, after the worst 2-week fall in over two years, both are down -2% year-to-date. The FTSE 100 fared much worse and was down -7.7% YTD touching 14-month lows. Contrastingly, the US Treasuries curve on Friday was back to where it was the previous week with the largest shift being a 7 basis point rise in 30-year yields. 10-years closed the week at 2.85% and the 30-years at 3.16%. Towards the end of the week emerging market and high yield bond indices dipped, typically around -1.5% to -2%, while investment grade corporates on average exhibited a more limited downside.

With these large swings in the market the major news story last week was the rocketing volatility: specifically the VIX which topped 50 at one point intraday after having averaged ~11 for the past 12 months. The Dow saw intraday swings exceeding 500 points every day last week with the moves exceeding 1000 points on three of those days. It seems a lot of retail investors got taken for a ride as many of the inverse-volatility products that have been returning ~8% a month for the past couple of years suddenly lost >80% of their value (many were down ~95%) triggering an ‘acceleration event’ with most halting trading and returning what little cash is left to investors at some point next week.

So it wasn't the best start to Jerome Powell’s first week as Fed Chair. But at least the US government agreed upon a budget bill last Thursday that will keep the federal wheels turning and increase spending over the next two years by $300bn. Technically the government did shutdown briefly for a second time this year as Senator Rand Paul delayed the vote, voicing concern about the US ‘borrowing a million dollars a minute’. The US public debt pile is now forecast to grow from $20tn now to $33tn over the next decade with Trump’s recent unbalanced changes to taxation and spending accounting for $3tn.

Elsewhere, oil majors all beat earnings expectations with Statoil doubling its profits. Brent prices however trended lower throughout the week which began around $70 per barrel and falling to touch $62 on Friday. SpaceX launched its test Falcon Heavy rocket (largest space rocket in 45 years) successfully sending Elon Musk’s Tesla Roadster into space: into an orbit that intersects both Earth’s and Mars’ orbit. So Tesla now literally has the only production car that is ‘out of this world’; although we’ve heard the insurance is also ‘astronomical’.

The week ahead is fairly light in data releases with: UK CPI/PPI, Japan PPI and US oil inventories on Tuesday; Germany, Eurozone and Japan Q4 GDP and US CPI and retail sales on Wednesday and jobless claims, industrial production and PPI on Thursday; and of course Chinese New Year this Friday.

The Weekly Update

Another mixed week saw the yield on the 10-year UST close 18bps higher at 2.84%, and the yield on the 30-year spiked above 3%. Concerns of sovereign oversupply, strong Q4 unit labour costs, a robust ISM (especially prices paid) reading and a strong December employment report were some of the causes for the continued sell-off. Friday saw the employment dump for January, unemployment was unchanged at 4.1%, however, the more closely watched average hourly earnings beat market expectations, at 2.9% yoy (the fastest pace since 2009) which led to a push higher in yields across the UST curve.  

The FOMC meeting saw Fed Chair Yellen hand the reins over to Jerome Powell. Described as somewhat dovish and cautious, it will be interesting to see if Yellen’s departure will lead to a change in rhetoric from the central bank; although we understand that Powell is expected to follow in Yellen’s ‘gradual’ footsteps, the easing of financial regulation may become a hot topic. The futures market is pricing an almost certain 25bps hike in March; and still only three rate hikes despite evidence of full employment and less lacklustre inflation. Despite the dollar bounce following the marginally better-than-expected employment numbers, the offshore renminbi continued its appreciation, gaining a further 0.21% against the greenback last week.

There is little in the way of key economic data this week, market focus will, therefore, turn to the ECB meeting on Thursday, although no change to rates is expected; with the recent mixed rhetoric, it could be interesting to see where forward guidance lies. Also on Thursday, with new no spending bill in sight, the US will face another potential government shutdown; no doubt another short-term funding deal will be announced.

Ahead of that, on Monday we will get a number of PMI readings from the EU and UK, and non-manufacturing ISM print in the US, and Mario Draghi will present his annual report to the European Parliament. The US trade deficit reading could be of interest on Tuesday, as Bloomberg estimates the gap could have widened to a nine-year high. On Thursday we will also hear from the BoE, on rates and inflation; the benchmark rate is expected to be kept at 0.50%. Ahead of that we will see the China trade date readings for January. A fairly quiet Friday will witness the opening ceremony of the 2018 Winter Olympics in Pyeongchang; it could be interesting to see how North Korea fares this year. Aside from that, China’s inflation numbers and UK IP print could garner some market attention.

The Weekly Update

US dollar weakness was one of the key themes driving financial markets last week. The trade weighted dollar index traded as low as 88.438, its weakest level since December 2014, on the back of the US Treasury Secretary Mnuchin appearing to ‘talk down’ the dollar at the World Economic Forum in Davos and a perceived step up in protectionist trade measures with the imposition of tariffs on solar panels and washing machines earlier in the week. The renminbi also rallied against the US dollar reaching 6.3263 up 1.17% (spot return) on the week. Against this backdrop the yield on the 10-year UST was unchanged at 2.66%.  The revised estimate on US GDP came in weaker than expected with Q4 GDP expanding at a 2.6% annualised rate when estimates had been looking for an increase of 3%: this reflected a drag from the inventories (-0.67%) and the trade component where net exports fell 1.13%. Consumer spending still remained strong expanding at a 3.8% rate.

The US started the week in government shutdown before the Senate passed a short-term funding bill late on Monday that lasts only until the 8th February. Meanwhile, In Davos, Treasury Secretary Mnuchin insisted that the US was open for business whilst welcoming a weaker dollar, believing that it would benefit the US economy. ‘Obviously a weaker dollar is good for us as it relates to trade and opportunities’ and that short term the value of the greenback was ‘not a concern of ours at all’.  He went on to add ‘Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency. What's happening in the U.S. is a reflection of programs being put in place. As we look at U.S. growth, it continues to look quite good and is a very attractive place to invest’.

This set off a whole series of responses with Christine Lagarde reminding him that ‘The dollar is of all currencies a floating currency and one where value is determined by the markets and geared by the fundamentals of U.S. policy.’ Mario Draghi also commented after the ECB meeting on the euro move saying that while some of the strength was justified by stronger growth that members of the ECB’s Governing Council were concerned by Mnuchin’s comments: ‘The concern was broader than simply the exchange rate, it was about the overall status of international relations right now.  This is also an additional concern.  If all this was to lead to an unwanted tightening of monetary policy which is not warranted then we would have to think about our monetary policy strategy.’ Following this, Donald Trump’s comments took a more conciliatory tone stating he expects the dollar to strengthen and ‘ultimately I want to see a strong dollar’. But any dollar rebound was short-lived, especially after the weaker than expected US GDP figure.

While we prefer the US dollar curve as we think more has been priced in for rate rises euro denominated sovereign issuance continued to be readily absorbed by the market. For example, a €10bn 10-year benchmark issue by Spain at a fixed coupon of 1.4% received €43bn of orders despite the Catalan situation, although a rating upgrade to A1 by Fitch may have sparked some interest.

Looking ahead, this coming week is likely to be dominated by news-flow from the US: on Wednesday there is the FOMC meeting rate decision; there is no press conference after the meeting and no increase is expected at this meeting and it is Janet Yellen’s last meeting as Fed Chair.  Other key US data releases include the PCE deflator for December along with personal income and expenditure, January’s ISM for manufacturing and January’s non-farm payroll data on Friday.  The market is looking for 180,000 jobs to be created, the unemployment rate to remain unchanged at 4.1% and for average hourly earnings to remain at 0.3% mom.

The Weekly Update

Another exciting week for markets last week saw the yield on the 10-year US Treasury spike to ten-month highs ahead of the government shutdown. Meanwhile, the dollar suffered another relentless fall, which helped the renminbi’s continued appreciation against the greenback over the week. Stronger than expected growth in China, at 6.9% in 2017, and robust activity data in December supported RMB sentiment. As did comments from the Bank of Spain that it is considering RMB inclusion and the National Banks of Belgium and Slovakia’s recent RMB additions (albeit small amounts initially). Datawise this week, we will get the China IP reading for December, on Friday.

The euro’s rally appeared to cause somewhat of a stir at the ECB last week; with members highlighting their concerns of the unhelpful sudden movements which are defying fundamentals. It should be an interesting meeting on Thursday, where Draghi may change the language to forward guidance. Meanwhile, closer to home, the BoE’s message appeared more hawkish following strong and stable inflation numbers, and Sanders said he is looking for a drop in the unemployment rate to below 4% this year, hence further rate hikes. Sterling had a stellar week too, as Brexit negotiations appeared to be progressing; there is still a very long way to go, especially in terms of trade deals and financial services deals.

The relatively quiet, holiday shortened week in the US saw misses on the Empire Manufacturing and Philly Fed readings, and month-on-month buildings permit and housing start prints. Later today we will get the Chicago Fed National Activity release followed by PMI prints on Wednesday, and new home sales number for December could be of interest, with markets expecting a fall on a m-o-m basis on Thursday.

A relatively quiet day today will see the IMF’s World Economic Outlook update and a stream of corporate earnings through the week, kick-started with Netflix. The Bank of Japan’s policy decision on Tuesday will be watched closely; there could be further colour on its stimulus unwind and economic forecasts. Further NAFTA talks continue on Tuesday, it could be interesting to see if Mr. Trump re-enforces his threats to drop out. Aside from the German ZEW reading, there is little key data to watch out for. As mentioned the ECB’s rate decision will be watched very closely on Thursday and the EC’s EU27 seminar on future relationships with the UK, could grab market focus. Friday will see the US’s Q4’17 GDP reading and durable goods orders. Mr. Trump will speak at the week-long World Economic Forum in Davos on Friday; we could hear the words “America First” echo through the speech. The forum will be closed by the BoJ’s Kuroda, BoE’s Carney and Christine Lagarde, MD at the IMF.  The UK’s GDP read will grab market focus on Friday, as will Japan’s inflation numbers.

The Weekly Update

Markets appeared to have woken up from their holiday slumber in an erratic mood last week as all manner of indiscriminate asset class moves were witnessed. USTs initially sold-off on the back of: concerns of increased sovereign supply, knee-jerk reactions following the BoJ’s “stealth taper”, rumours suggested that China is looking to either cut or halt their purchases of their USTs (these rumours were later quashed by SAFE) and the hawkish ECB minutes. Solid demand for the 30-year UST auction did, however, bring some relative calm to the curve on Thursday. All this before the much awaited December CPI readings, where the headline number was broadly in line at 2.1% yoy while the core reading beat estimates at 1.8% and firmed up from November print. This coupled with strong retail sales readings saw the yield on the 2-year UST spike to 2%, leading to further UST flattening; the 10-year moved 7bps higher over the week to 2.55% while the 30-yr was up just 4bps. Meanwhile, the dollar witnessed a further rollercoaster week; the DXY Index broke through the 91 level, plummeting over 1% over the week.

Staying with trade, having made a huge push to encourage international trade over recent years, the US could witness a major u-turn this year as Mr, Trump piped up about his “aggressive” trade ideals last week. It seems his attack against China’s (and other economic competitors’) “unfair trade practices” sparked the aforementioned response from an unknown source in China regarding its UST holdings. The latest data (end October 2017) shows that China holds ~USD 1.2tn of UST positions within its ~USD 3.14tn fx reserves; which have been increasing over the past consecutive 11 months. There is currently nothing substantial to be concerned about, however, we will continue to monitor what will be an interesting year in terms of global trade agreements. We do, however, feel that it would be highly counterintuitive for the world’s two largest economies to clash on trade, and instead look for ways to manage the huge trade deficit gap.

Earlier in the week, China tweaked the way in which it manages the renminbi fixing methodology by temporarily dropping the counter-cyclical-factor (CCF); in a bid to allow market forces a greater say in how the renminbi is fixed daily. This once again underscores policymakers’ increased flexibility in the way renminbi trades and reiterates that China is not as concerned about the appreciation of the redback against the dollar. The obvious knee-jerk reactions saw the renminbi tumble following the news, however, the offshore unit rallied to month highs and is this morning trading at strong levels last seen in December 2015; up 1.16% against the dollar (at time of writing). We also heard from the Bundesbank earlier this morning, on its decision to include the renminbi in its fx reserves; following the ECB’s inclusion in June last year. Although Germany’s central bank did not comment on the amount of inclusion, this will no doubt give the Chinese currency an added boost on its road to internationalisation.

Also last week, Premier Li Keqiang said the Chinese economy grew around 6.9% in 2017. He also said that the economy had fared better than expected adding that a survey on urban employment showed the lowest rate of unemployment in several years. We look to the official growth figures due on Thursday, if the GDP print does match the market consensus for 6.8% ytd yoy, this will be the first time the economy has witnessed an acceleration in growth since 2010. Aside from the better than expected fx reserves print and robust trade data releases for December, China’s CPI and PPI readings for December were broadly in-line with expectations, and at levels which will not create any unnecessary monetary policy pressure; so policymakers can focus on China’s number one priority, de-leveraging. Away from the GDP releases on Thursday, we will also get the December retail sales, fixed assets and IP data for December, all expected marginally unchanged from November.

Elsewhere, the two Koreas met, with little substantive outcome aside from the decision to allow the North counterpart to participate in the Winter Olympics, commencing next month in Pyeongchang. Further talks are expected to resume between the two nations. Last week also witnessed Theresa May’s cabinet reshuffle and a German coalition breakthrough. It’s worth highlighting Germany’s GDP reading at 2.2% last year; although below market expectations, it was the fastest expansion since 2011. The euro enjoyed a 1.44% rally last week, to its highest level against the dollar in three years. This will no doubt add fuel to Europe’s already optimistic outlook; the ECB meeting on the 25th January could be very interesting. Oil was another big story last week as Brent peaked above $70 intra-day on Thursday; and closed 3.33% higher over the week, at $69.87.

Bond and equity markets will be closed in the US today as the country celebrates Martin Luther King Day. Today will also see Greece’s parliament vote on the omnibus bill; in order to receive its next loan. UK inflation and the US Empire Manufacturing reading for January could grab some attention on Tuesday, as could the meeting between Canada’s Foreign Affairs Minister and the US’s Tillerson where security and stability on the Korean peninsula will be discussed. On Wednesday, US IP and the Fed’s Beige book could be of interest, as could Trump’s “Fake News Awards” presentation. A number of EM central banks will announce their rate decisions on Thursday, but China’s  Q4’17 GDP and activity prints will be the focal point, ahead of the US’s housing starts and building permits releases. The deadline for the US government shutdown ends on Friday, when we will also get the UK’s retail sales print for December and various sentiment readings from the US.

The Weekly Update

The Stratton Street Team would like to wish all our readers a very happy and prosperous 2018.

An interesting couple of weeks has followed our last weekly report, we’ve had: Jong-Un and Trump gloat about the location and size of their nuclear buttons, clashes in Iran, broadly stronger PMI and ISM numbers, signs of a pick-up in global growth, a record breaking US equity market, US yield curve flattening, renminbi appreciation, and of course the US tax “legislative victory”; amongst other events.

Last week we heard from the FOMC following the committee’s meeting in December (where the central bank hiked rates by 25bps to 1.25%-1.50%). There appeared to be mixed feelings about inflation, with recent readings showing a pick-up in prices of goods and services, some members argued that inflation may remain below the central bank target for some time. Meanwhile, others warned of the possibilities that increased output resulting from recent “fiscal stimulus or accommodative financial market conditions” could, in fact, cause inflation to spike. On the recently passed tax bill, a number of participants judged that business taxes “would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain”. There was also a mention, that although the labour market remains strong, “wage increases has generally been modest”; on Friday average hourly earnings for December were in-line with expectations at 2.5% yoy. Overall, most participants maintained their view for “continuing a gradual approach to raising the target range” (three rate hikes for 2018 are currently priced in, with the next hike expected in March).

Broadly stronger US data, including a stronger-than-expected ISM manufacturing reading saw a bounce in the dollar, which eventually lost its footing following the FOMC’s “gradual” comment, and weaker-than-expected non-farm payroll and ISM composite prints. Meanwhile, the yield on the 10-year US Treasury sold-off 7bps, closing the week at 2.477%. This week we’ll get the JOLTS job openings report on Tuesday. Import and export price indexes follow on Wednesday, where the month-on-month readings are expected to have dropped in December, from previous levels. Thursday will see December’s PPI releases, and December’s monthly budget statement, and the week ends with CPI prints (headline number expected at 2.1% in December) and retail sales readings (expected to have weakened in December from previous levels).

Elsewhere, the renminbi maintained its stronger trend against the dollar, gaining 0.55% over the week. With the renminbi breaking through the 6.50 level last week it is clear that policymakers are unfazed by its appreciation, and a stronger renminbi could help stem capital outflow. Meanwhile, Caixin PMI readings for China surprised to the upside in December. During China’s Central Economic Work Conference - where policy and forecasts were set for 2018 - there was an emphasis placed on “high quality growth”, at the expense of faster pace of expansion; it was very apparent that policymakers would tolerate slower growth going forward. Although no growth target was mentioned at the conference, according to sources, at a closed-door meeting during the event top leaders agreed to keep the target at “around 6.5 percent”. The pick-up in global growth will no doubt support China's economic expansion. In terms of data, this week we’ll see China’s PPI and CPI prints and trade numbers for December.

Also this week, the two Koreas are expected to hold talks for the first time since 2015 tomorrow. Ahead of that PM Theresa May will begin the process of reshuffling her cabinet. We will also see the ongoing coalition discussions in Germany, and France's Macron visit to China could garner some interest. On Wednesday, South Korean President Jae-In will host a New Year conference where the likes of North Korea, and relationships with China and the US are expected to be discussed. 2017 growth estimates for Germany could be of interest on Thursday, as could the ECB’s December meeting notes release. Also on Thursday, China is due to commence its three-day annual plenary meeting, where it will set the agenda for its anti-corruption campaign for the year. Mr. Trump's first medical examination by a government doctor will take place on Friday; the subsequent official statement on the president’s health could be of interest to some. We will also hear from a number of Fed members later today; discussing Inflation targeting, with others speaking about Monetary Policy and the US Economic Outlook.

The Weekly Update

Risk appetite picked-up into the latter part of the week as the US House and Senate both voted in favour for a two-week extension in federal funding through to December 22, and the rumor mill suggested Mr. Trump could announce his US infrastructure plans as soon as January. We expect to hear more on the House and Senate reconciled tax-cut proposal in the next couple of weeks leading up to year-end; ahead of this Trump will present his closing argument for the GOP tax overhaul on Wednesday. Despite the yield on the 10-year UST selling-off after the US government announced it would avoid a shutdown over the weekend, and the non-farm payroll print beat expectations, it closed marginally unchanged over the week. Meanwhile, the dollar regained momentum. The UST yield curve flattened further over the week to new decade lows; we gather the reason behind spread compression between the 2s 10s and 5s 30s is due to longer-dated UST buying from US corporates, to pre-fund pension requirements in order to benefit from the current deductible rate; expected to be reduced once the proposed tax-bill comes to fruition.

Elsewhere, Japan’s Q3’17 GDP reading buoyed the risk-on environment; rising to 2.5% qoq verses expectations for +1.5% qoq. Early Friday morning we also got wind of a last-minute Brexit ‘breakthrough’; according to sources the divorce settlement could be as much as GBP 60bn, there will be no ‘hard border’ with Ireland, and EU citizens residing in the UK, and vice versa will have their rights protected. Trade talks should commence soon, but there is still a very long road ahead in negotiations. Elsewhere, the German coalition discussions will officially commence on Wednesday, if Germany’s future vice-chancellor Martin Schultz, from the SDP party gets his way, the EU could be transformed into the ‘United States of Europe’ by 2025; if this does ever happen, the ‘United’ Kingdom will be watching from the outside.

Meanwhile, a strong data week saw China’s trade data for November beat market expectations, with exports jumping to 12.3% yoy in dollar terms, imports also remained strong in November. Caixin PMI readings improved in November, and remain comfortably in expansionary territory. The country’s FX reserves also increased last month. Over the weekend we had the CPI and PPI readings for November; PPI was broadly in-line with expectations, however, CPI softened in November. Later in the week, we will get the retail sales, fixed asset and industrial production releases for November; all expected broadly in-line with October’s figures.

Elsewhere, Mr. Trump’s comments on Jerusalem led to Hamas calling for an ‘intifada’ against Israel (and Trump). This ’declaration of war’ is the third of its kind in the region but is not, at this stage, expected to be as violent as the previous one in the early 2000s. Both previous uprisings actually weakened the Palestinian economy, so it will be interesting to see just how far Ismail Haniyeh, the leader of Hamas, is willing to go. Currently, we see limited spillover into the rest of the Middle Eastern region. Aside from the broad spread widening witnessed across investment grade and high yield bonds, we didn't witness any indiscriminate sell-off across our holdings in the regions sovereign and quasi-sovereign issues.

As we fast approach the year-end holidays there are a number of key data prints, and political and policy events ahead. Today we have further NAFTA talks, EU diplomat discussions over Brexit and the US Jolts print. Tuesday kicks-off with UK inflation readings, and later the US PPI print for November. Germany’s ZEW could also garner some attention as could the US November monthly budget statement. With the US employment sector clearly strong, CPI readings are expected to be watched very closely on Wednesday; especially after a dip in average hourly earnings in November. The main feature on Wednesday will be the FOMC rate announcement, where a 25bps hike (to 1.25%-1.50%) is expected. We will also hear more in Brexit negotiations on Thursday as the EU parliamentarians, Junker and Tusk meet in Strasbourg. Might be worth looking up at the sky at night, as you may be able to catch the Geminid meteor shower late Wednesday night.

Super Thursday will feature the ECB policy meeting, expected to stay put on rates and bond-buying programme, and the BoE policy decision; also expected to remain unchanged, however, policy signals into next year could be of interest. The Swiss National Bank will also gather on Thursday, its quarterly policy assessment, and growth and inflation forecast could grab market attention, as the central bank maintains its record low -0.75% deposit rate. Putin’s end-of-year conference could be watched closely; ahead of another six-year term as president commencing in March. The end of the week will see the EC council summit conclude, aside from this we will get the Euro Area’s trade data for October, US empire manufacturing data and November IP release.

The Weekly Update

The yield on the 10-year US Treasury tracked marginally higher over the week off the back of broadly stronger US data; including an upward revision to Q3’17 GDP and PCE Deflator yoy readings. ISM prints did, however, disappoint. Yellen’s upbeat testimony (her last as Fed Chair) to Congress and the vote on the Senate’s tax bill also boosted market sentiment; despite the in-house political drama. The Fed’s Beige Book also highlighted a pickup in US economic activity. Meanwhile, the DXY (dollar index) regained some momentum after the Senate’s 51-49 vote on tax-cut legislation. The next step will see the House and Senate work to reconcile their tax bills; one of the differences include the pace and timing of corporate tax cuts; which, according to Mr. Trump, could be sliced to 22%, instead of the House-proposed 20%. So, one to watch in the coming weeks, with an agreed tax-bill expected before the year is up. More importantly, however, Congress faces the Dec. 8 government funding deadline; in order to avoid a government shutdown on Friday.

Other headlines which grabbed market attention last week included: the Bank of Korea’s 25bps ‘dovish hike’ to 1.5%; the central bank stated that inflation is expected to stay ‘in the mid-1% range for some time.’ Meanwhile, OPEC and Russia agreed to a further extension to production cuts (into end-2018) which saw Brent spike higher; according to Russia's energy minister, Novak, ‘everybody recommended to extend the agreement’. However, all parties also agreed that this is a flexible extension; if oil prices were to overheat, the length of extension would be reconsidered. Elsewhere, UK PM May agreed to pay over double the initial exit-fee, in order to kick-start trade negotiations; sterling traded higher against the dollar following the news. All eyes will be focused on the Brexit developments this week (ahead of the EU summit next week), events include: PM May’s meeting with EC president Juncker today, the EC College of Commissioners’ decision on the extent of Brexit negotiations on Wednesday and David Davis’ Parliamentary Committee, expected to be formed on Wednesday.

As mentioned, Brexit developments will be a main feature this week, US employment day releases on Friday will also grab market attention; current expectations are for +199k jobs created in November, no change to the unemployment rate and a pick-up in average hourly wages. Ahead of this we’ll get the factory orders and durable goods readings later today, US PMI and ISM readings on Tuesday and ADP employment change reading on Wednesday. China’s trade data and Caixin PMIs for November will also be of interest, with the former released on Friday. We will also get China’s FX reserve release this week, markets currently expect a spike to USD 3.123tn  in November. Thursday will be dominated by German coalition discussions, and we’ll also get the German IP print, Q3’17 GDP reading for the Euro Area and final revision of Japan's Q3’17 GDP reading.

The Weekly Update

A relatively quiet Thanksgiving week saw the yield on the 10-year US Treasury close unchanged from the previous week and the dollar (DXY Index) tumble for the third consecutive week. Meanwhile, the offshore renminbi broke through the 6.60 level on Friday, closing 0.73% stronger against the dollar.

This week tax reform could attract much attention as Senate votes on its proposed tax bill (expected on Friday); Republican policymakers would like to get the tax bills reconciled by Christmas. Meanwhile, markets will be watching the German coalition talks this week as Merkel’s CDU party discusses a potential ‘grand coalition’ with the Social Democrats (SPD). This morning we saw China’s Industrial Profit reading for October fall marginally; although still robust at 25.1%. There’s not much in the way of other key economic data prints today, however, what could be of interest is New York Fed President Dudley speech on the “U.S. Economy: 10 Years After the Crisis”. Tuesday’s focus will be the confirmation hearing for newly nominated Jerome Powell, who is said to favour gradual rate hikes and understands the needs for the easing financial regulation. Meanwhile, President Trump will gather with Republican and Democratic leaders to kick-start the federal spending debate ahead of the Dec, 8 deadline.

Fed Chair Janet Yellen’s is due to testify before the Congressional Joint economic Committee in Washington on Wednesday, this will be her last appearance in front of Congress as Fed Chair. Key data releases out of the US include the second estimate for Q3’17 GDP, personal consumption and core PCE, the beige book will also be released on Wednesday. A busy data day on Thursday will kick-off with China PMI readings (we also have the Caixin PMI release on Friday) and Japan’s CPI October reading, US personal income and personal spending prints, and the Fed’s favoured PCE deflator (and core) releases for October.

OPEC and Russian leaders will gather in Vienna on Thursday; there have been rumours that as much as a 9-month extension to supply cuts could be agreed upon (a 6-month extension could be more likely with a subsequent review following this period). Brent continued to hold up last week, closing at $63.86 (up +1.82%). Thursday could also see an interest rate hike from the Bank of Korea. Then on Friday we have the US ISM figures for November, there will also be a number of Fed members speaking, including Kaplan and Bullard; who is due to speak on economic outlook.

The Weekly Update

Last week the US Treasury curve continued to bull-flatten, with the spread between the 5-year and 30-year tightening to ten-year lows; historically this measure has been used as a recession indicator - the tighter the spread and more inverted the curve the stronger the trigger. However, at this stage of the cycle, we do not expect the US to enter into a recession. The tightening appears to be more a case that the US curve is sufficiently more attractive; the 10-year UST, for example, offers roughly 2% additional yield compared with the equivalent Bund and JGB benchmarks. The 10-year yield ended the week 6bps lower, at 2.34%.

US data releases last week included the October PPI which spiked to 5.5 year highs; with demand primarily driven by rebuilding post-hurricanes and following the wildfires. Headline CPI moderated in October, in-line with expectations, to 2%, while the core reading edged higher to 1.8%. Retail sales, also cooled in October, broadly in-line with market expectations and the November Empire Manufacturing gauge plummeted from its three year high. Import and export price indices also disappointed in October. The dollar (DXY Index) once again struggled to find its feet, falling 0.77% over the week.

The sell-off across the USD 1.3tn junk bond market grabbed market attention last week, according to ICE BofAML Indices, spreads across sub-investment grade bonds widened as much as 59bps, from the lows witnessed last month, to average yields of 6%. This is the second largest move this year; back in March spreads across the asset class widened 61bps in under three weeks. So, this could be one to watch in the coming weeks. As regular readers are aware we currently hold no junk bonds.

China’s bond ‘rout’ also hit the newswires last week, the yield on the 10-year benchmark crept above 4% for the first time in three years; the PBoC responded by injecting liquidity into the financial system and the yield eventually closed the week at 3.93%. Also of interest last week was a paper written by the NY Fed staff on ‘China’s Evolving Managed Float’, which concluded that “China’s recent approach to managing the fix, and exchange rate more broadly, appears to have been a success.” Increased visibility and predictability were highlighted as some of the reasons that have “helped desensitized global markets to fluctuations” in the renminbi cause by dollar moves. Noting that the renminbi “has held broadly stable” against the CFETS basket, the report underscored the “sharply scaled back currency market intervention” by Chinese policymakers. As of Friday’s close, the offshore renminbi is up 5.12% against the dollar so far this year, with carry at just over 4%.

Data releases out of China suggested some softening in activity in October, meanwhile, the housing market also cooled in October, resulting from sector tightening measures. Despite recent softer readings, “The economy continues to operate in a reasonable range in terms of production, employment, inflation and corporate profitability,” Liu Aihua, a statistics bureau spokeswoman said in Beijing, adding “The growth momentum remains good, laying a solid foundation to achieve the full-year targets.” As the country strives to manage financial risks, deleverage and push forth with supply-side reforms, economic growth is expected to slow, however, market speculations of a ‘hard-landing’ have ebbed and Chinese policymakers have reiterated their preference for slower and more sustainable growth; which is currently above the government's target.

A Thanksgiving holiday-shortened week will see further Brexit discussions as EU foreign and European ministers meet today; according to sources, PM May could look to get cabinet approval to double the ‘divorce settlement’, originally touted at EUR20bn. The new location for the European Banking Authority and European Medicines Agency will also be decided today. On Tuesday we will hear from Fed Chair Janet Yellen “In Conversation with Mervyn King” in New York, and the Chicago Fed National Activity Index could be of interest. Wednesday’s key event will be the UK’s Budget Statement; growth forecasts will grab market attention with Brexit concerns looming. Later we’ll get the FOMC minutes for the 2nd November meeting, we expect little change in rhetoric; a December hike is still penciled in. Mr Putin is to host discussions on Syria at a summit in Sochi; Turkish and Iranian presidents are due to attend. The preliminary reading for US durable goods orders in October may garner some attention, with market expectations at only 0.3% (vs 2% previously).

US bond and equity markets will be closed on Thursday for Thanksgiving; according to the American Farm Bureau Federation estimates that 46 million turkeys will be consumed and the average cost of feeding a group of 10 has fallen to the lowest level since 2013. In terms of data, we’ll see a number of PMI readings across Europe, and Germany’s Q3’17 GDP print, and the UK’s second reading. Also on Thursday, we’ll see the release of the ECB minutes. OPEC’s Economic Commission Board will gather in Vienna ahead of Nov, 30 meeting; expectations are for the continued enforcement of supply cuts into mid-2019. Black Friday will kick-off with Japan’s manufacturing PMI for November and the German IFO print. This will be followed by US Markit PMIs. The fate of South Africa’s long-term rating hangs in the balance, as Moody’s and S&P publish their reviews on Friday. South Africa is rated BB+ by both S&P and Fitch, and Baa3 by Moody’s so a one-notch downgrade by the latter could see the country’s long-term rating junked. As further delays are expected on the US tax front, Senate is now expected to vote on its version next week; this may see a continuation of the softer market sentiment tone this week. Also, through the week, news on the formation of a German coalition (and a possible fresh election) will grab market attention as will the unfolding events in Zimbabwe; where Mugabe could face impeachment.

The Weekly Update

Last Thursday marked Trump’s first year in office, as the Independent put it he has made “2,470 tweets and 0 major legislative achievements”. According to 73.9% of 929 economic experts surveyed across 120 countries, Donald Trump is “negatively influencing the world economy”; 57.6% think the Trump-administration is hurting the US economy. As we get closer to the end of the calendar year, markets appear to be running out of patience with the lack of fiscal reform promised over a year ago, during Trump’s campaign. Also on Thursday, the US Senate published its tax reform bill which differed from the proposed House Bill; one example could be Senate’s proposal to delay the drop in corporate tax (to 20%) for a year (i.e. into 2019) versus the House’s call for a cut by January 2018. Expectations are for this to remain a contentious area with many market players expecting further delays in implementation as the two attempt to bring their proposals more acceptably in-line. The House’s proposal will be voted on this week, while the Senate Finance Committee brushes up on its own version; expected to be voted on before Thanksgiving. US Treasuries indiscriminately sold-off last week with the yield on the 10-year up 7bps to 2.399% and the dollar fell 0.58%, measured by the DXY Index.

A relatively quiet data week saw a surge in consumer credit in September; US credit-card debt exceeded USD1tn. This week kicks-off with the monthly budget estimate later today. PPI and CPI readings follow on Tuesday and Wednesday, respectively, market calls are for headline CPI to moderate to 2% yoy, with the core reading for October at 1.7% mom. The Empire manufacturing reading on Wednesday could grab market focus as expectations are for a dip. Retail sales readings follow, expected to be softer in October (following the post-hurricane surge in purchases). Thursday will see the import and export price Index prints, also expected to be softer for October. Housing starts and building permit data for October could be of interest on Friday, after the weak September readings.

Elsewhere, China’s reserves remained robust in October, in a statement following the release the State Administration of Foreign Exchange (SAFE) said it expects ongoing reserve stability as confidence in the country’s long-term economic development increases, coupled with a firmer foundation for balanced cross-border capital flow and international payments. October’s trade data (USD) remained robust as exports were held up by strong global demand, while a bounce in imports continues to underline strong domestic demand. Inflation readings remained steady in October, price pressures are expected to remain strong going forward, as economic growth remains robust, the labour market remains tight and the anti-pollution drive holds up commodity prices; currently, we see no need for the PBoC to change policy direction. Tomorrow will see China's retail sales, fixed assets and industrial production releases for October, this week we will also get the FDI reading for October.

In a bid to further liberalise China’s financial sector, on Friday Vice Finance minister Zhu announced plans to ease restrictions on foreign investment into China; foreign firms could potentially own controlling stakes (up to 51% - from 49% - after 3 years, with no limit after 5 years) in joint venture firms within the financial sector. This development will be worth monitoring as the world's second-largest economy strives to ease barriers across its financial markets, having already made big moves in opening up its equity and bond markets to foreign players.

On Friday S&P announced it had cut its rating for Oman by one notch to BB. Moody's and Fitch still have the country rated Baa2/BBB. The sovereign bonds remain attractive, we calculate the: 5.375% 2027s are currently trading 3.3 notches cheap with expected return and yield of 15%, while the 6.5% 2047s are 3.7 notches cheap with a 32% expected return and yield. Moody’s is to review Saudi Arabia’s A1 rating this Friday; no change to the rating is expected.

This week will see final readings for October CPI in the UK and Germany tomorrow, followed by France and Eurozone on Wednesday and Thursday, respectively. Interestingly, the Retail Price Index (RPI) measure is expected to surge up to 4.1%yoy in October, the first time since December 2011. On Wednesday, Japan’s industrial production will be of interest as the previous month-on-month reading was surprisingly weak.  

Central bank chat could dominate this week, today we will hear from the Fed’s Harker, the ECB and Japan’s Kuroda. Trump and Tillerson are due at the US-ASEAN summit as their Asia trip comes to an end this week. Tuesday will be another exciting day as Fed Chair Yellen, the ECB’s Draghi, BOJ’s Kuroda and BoE’s Carney speak at an event hosted by the ECB panel. What could be of interest is any indication that Yellen could remain on the Board of Governors once she leaves her Chair position to Powell. Also on Tuesday, we will hear from the Fed’s Evans, Bullard and Bostic and ECB’s Coeure and de Galhau. Trump’s attendance at the East Asia Summit may garner some attention. Focus is expected to move the UK’s Brexit bill, on Tuesday and Wednesday, where we may see come give-up on the EUR 60bn leaving ‘fine’; the UK is officially expected to leave the EU at 2300 (GMT) on Mar 29, 2019; there is still a very long road of negotiations ahead, especially in term of trade deals. Wednesday will see a continuation of central bank chat, as the ECB’s Praet, Fed’s Evans, BoE’s Haldane, amongst others are due to speak.  We could also see the fifth round of NAFTA talks commence on Wednesday. UK retail sales readings for October could surprise to the downside on Thursday, while France’s unemployment reading may have tracked lower in Q3’17. The week will end with Draghi’s keynote address in Frankfurt, followed by the Fed’s Williams note.

The Weekly Update

A busy week saw Fed rhetoric broadly unchanged from the previous FOMC meeting; with a hike in December still on the table, despite ‘soft inflation’. Mr Trump announced his preference for Jerome Powell as the next Fed Chair; after Janet Yellen’s term ends in February. Powell already serves on the board as a governor and is expected to continue on the same monetary policy path; from February 2018. US unemployment numbers released on Friday showed continued strength in the labour market; unemployment edged lower to 4.1% (as a result of a shrinking workforce) but, average hourly earning surprised to the downside, falling to 2.4%. Broadly, robust economic data, including ISM prints continue to confirm ‘solid’ US growth; propping up the dollar higher. The yield on the benchmark 10-year US Treasury rallied 7bps to close the week at 2.33%, while the VIX (volatility) Index dropped to new all-time lows.

Meanwhile, the highly anticipated draft tax Bill, detailed a drop in corporation tax to 20% (with no expiry date) from 35%. Unfortunately, more personal tax reforms within the draft didn't get the market excited, and seemingly touched a nerve in terms of a bias towards higher earner; Chuck Schumer warned that the plan ‘exacerbates the unfairness and inequality in our tax code’. It seems there is still a long way to go and most expect the current ‘radical’ plan in its current form will not be passed. A data-light week ahead will be dominated by news flow from the Trump-administration’s first Asia trip and further developments on the tax plan draft; which the House is expected to vote on by the end of this week. Senate is expected to come up with its own version, working in coordination with the House to achieve a more aligned proposal with agreement anticipated by Christmas; this could help boost Trump’s current poor approval ratings. This week will also see the continuation of the Trump-administration's first official Asia trip, where North Korea, trade (US business) and investment will be high on the agenda. The entourage is currently in Japan, moving onto South Korea on Tuesday, China on Wednesday, Trump will then deliver his first ever APEC summit speech in Vietnam towards the end of the week and the trip comes to an end in the Philippines on the 12th.

The other big news last week was the BoE’s decision to hike rates by 25bps to 0.5%. The market was not sure what to make of the mixed message, however, read it as a dovish hike. The gilt curve rallied off the announcement, while sterling collapsed. Brexit talks will resume later this week, news reports point to Brussels’ infuriation as the UK ‘admits next round of talks will be talks about talks’. When asked whether Brexit would prevent the BoE from cutting rates Governor Carney said, ‘That’s an extreme possibility but it's a possibility’.

Meanwhile, Venezuela began the arduous task of restructuring its debt, as it attempts to avoid defaulting. Rating agencies reacted by slicing its already junk rating into ‘potential default’ territory. We expect to hear more this week and beyond; US sanctions will no doubt make unravelling Venezuela's debt (sovereign's $37bn, PDVSA’s $43bn and huge amounts of unlisted debt), and sourcing additional financing that bit trickier. We are not holders of Venezuela's debt.

Turning the Middle East, Fitch affirmed its rating for Saudi Arabia at A+, outlook stable. Fitch highlighted that the Kingdom’s  rating is supported by: ‘strong fiscal and external balance sheets, including exceptionally high international reserves, low government debt, significant government assets and strong commitment to an ambitious reform agenda’. Staying with Saudi Arabia, King Salman began his anti-corruption purge starting with the arrest of  Prince Alwaleed bin Talal, senior royal family members, cabinet ministers and other senior officials. Seen as credit positive we expect to see further developments through the week. The Kingdom’s bonds have held up well, off the back of the news and reports over the weekend of a blocked missile attack from Yemen; the sovereign bonds are off only 3-4bps currently.

Brent enjoyed a further rally last week, reports that Iraq’s Oil Minister Jabbar al-Luaibi said the country backs OPEC’s decision to support oil prices helped boost crude prices. The ongoing anti-graft probe in Saudi Arabia could continue to lend support to crude in the coming week. As could the news over the weekend, where Russia, Saudi Arabia, Uzbekistan and Kazakhstan agreed to work towards reducing global inventories.

This week kicks off with the final round of October PMIs in Europe. With limited data out of the US, focus could turn to the Fed’s Potter and Dudley who speak later today. German industrial production (IP) on Tuesday will be followed by September’s eurozone retail sales, and the October JOLTS job report out of the US. OPEC will present its oil outlook later in the day on Tuesday. Early-doors Wednesday we’ll get China's trade data dump, and fx reserve data (at some point during the week). China’s CPI and PPI data for October will be of interest on Thursday morning, followed by German trade data and UK IP. Friday will see the US’ monthly budget statement, a quiet day is expected as the bond market will be shut in the US ahead of Veterans Day on Saturday.

The Weekly Update

A combination of broadly stronger US data readings, excitement around the tax-plan and anticipation surrounding the Fed Chair position saw US Treasury yields track higher last week; the yield on the 10-year benchmark was up 4bps to 2.41%. The DXY (dollar) Index rallied 1.22% over the week, fuelled by the passing of a budget resolution on tax reform. In terms of US data, the Chicago Fed National Activity Index surprised to the upside, as did the preliminary durable goods print for September; which incidentally drove 10-year yields higher. The initial Q3’17 GDP estimate was at 3%, marginally lower than Q2’17.

Later today personal income, personal spending and the Fed’s favoured PCE readings will grab market attention. PMI and ISM follow on Wednesday, followed by the FOMC meeting, where the rate decision will be announced on Thursday. All eyes will turn to October’s employment prints, which will be an interesting set of data, following the weak hurricane-affected September readings; market expectations are for +312k jobs, unemployment unchanged at 4.2% and a dip in hourly earnings on a mom and yoy basis. Away from economic data, this week we expect to hear more on the tax-overhaul, and budget debate. Also, Trump may select the Fed chair (effective next year), ahead of his Asia trip which commences on Friday; Politico reports suggest it will be between Fed Governor Jerome Powell and Stanford University economist John Taylor. The former is expected to continue on the current policy path, while a hawkish Taylor believes rates are too low.

Elsewhere, China’s 19th National Communist Party Congress came to a close on Wednesday, officially marking the beginning of President Xi Jinping’s second term as party general secretary (and points towards a likely third!). Xi furthered Deng Xiaoping’s reforms and ideology of the 1980s surrounding his “theory on socialism with Chinese characteristics”. How exactly “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” will look, only time will tell. But, further to Xi securing more influence for himself, there was the unavoidable rhetoric for the pursuit of “more balanced economic growth”. The idea of more balanced growth across demographics and regions is an important one. It signals that Xi now feels more able to confront the established and privileged elite and that the nation must now strive beyond “prosperity for some so as to achieve prosperity for all”. The ebbing crackdown on corruption should continue and special attention towards western and central Chinese states should help address these long marginalised provinces.

The renminbi weakened marginally over the week; on the back of a strong dollar. There was not much in the way of key economic data prints for China last week; industrial profits gained year-on year in September. Tomorrow we see the official PMI releases with the Caixin manufacturing reading later in the week.

Elsewhere, the ECB left rates unchanged, and announced that it will reduce its monthly asset buying programme by half, to EUR 30bn, from January 2018. Following the announcement, ECB President Draghi said the decision ‘reflects growing confidence in the gradual convergence of inflation rates towards our inflation aim on account of the increasingly robust and broad-based economic expansion’. He did however add that ‘domestic price pressures are still muted overall’. The benchmark ten year German Bund rallied off the back of the announcement and the euro took a nosedive, falling 1.5% against the US dollar over the week; playing right into Draghi’s hands. The actual Q3’17 GDP reading and unemployment figure will be released on Tuesday. We also have the Bank of England meeting on Thursday with a 25bp rise in rates widely expected.

On the the new issue front, China’s first USD denominated offering, in over 13 years, was a roaring success. Over 11 times oversubscribed, the USD2bn two tranche deal, issued out of Hong Kong unfortunately left very little on the table; the 5-year tranche priced at only 15bps above USTs, while the 10-year was issued at just 25bps over. We calculate that both deals were expensive on a relative value basis, thus we did not add to our portfolios. The bonds are also not rated by the three major rating agencies, although they have rated China A1/A+; so an implicit rating can be used to price the bonds; which we have calculated as ~3 and ~3.75 notches expensive, respectively.

We did, however, add the a 30-year (amortising) bond from state-owned Abu Dhabi Crude Oil Pipeline (ADCOP). Rated AA, the bond was issued at a yield of 4.6%, using our proprietary Relative Value Model, we calculated that the bond is over 6 notches cheap. This deal was particularly interesting as we think the long-end of the Abu Dhabi Government curve is attractive in its own right. We calculate the Abu Dhabi Government 4.125% 2047’s yield is close to 4.2% and is trading over 4 credit notches cheap. As regular readers are aware, we feel quasi-sovereign issues from creditor nations remain compelling investments.

The Weekly Update

Last week US 10-Year Treasury yields rose 11bps with a level move up across the curve and global equity markets pushed new highs on slightly improved global economic outlooks. The renminbi (CNH) weakened from 6.57 to 6.62 partly due to the dollar strengthening with the DXY Index moving 0.66% to 93.70. The Merrill Lynch Fund Managers’ survey reported average cash balances were down to 4.7%: their lowest in 28 months. With this recurring ringing of “new all-time-highs” markets this week reminisced the 30th anniversary of Black Monday.

China’s 19th National Communist Party Congress began last week and continues through to the middle of this week. It looks like only President Xi and Premier Li will remain on the Standing Committee with Xi handed his second five-year term at the closing of the meeting on Wednesday 25th. Furthermore the PBOC governor announcement  looks set to name Gui Shuqing, currently Chairman of the CRBC.

Over the weekend Abe’s gamble turned into a landslide victory causing the NIKKEI to rocket beyond 21,700, continuing 16 months of solid performance whilst the yen was pushed down given that the win removes some of the fear of the BoJ easing policy; Abenomics gets a new lease of life as Haruhiko Kuroda (or at least a like minded candidate) is expected to be reappointed as the Bank of Japan Governor. Touching 114 the Japanese yen stands at a 100 day low.

The fourth round of NAFTA negotiations ended last week; it was clear that the previous December target was unfeasible considering the "strong differences that remain" and that the "new proposals have created challenges". But it was agreed to extend the talks into the first quarter of 2018. On news of this, the Mexican peso rallied almost 2% from its weak point a couple of days earlier. The prior 7% depreciation of the peso over the past month was a sharp retracement of the bullish sentiment the markets had during the first half of the year; and amongst various causes was triggered by Trump's characteristic uncompromising and hard-line position on NAFTA. The agreement pertains to $1.2 trillion in annual trade between the US, Canada and Mexico: particularly vulnerable is the auto industry which has various back-and-forths between Mexico and the US across the various production stages. Mexico arguably has the best source of cheap labour for such production with an autoworker's salary less than $4 per hour; that is just 12% that of an average worker north of the border. This is one of the major sticking points with the US obviously wanting to sign a series of international labour agreements to increase the minimum wage of autoworkers.

In the week ahead the ECB announces its rates decision on Thursday and is expected to offer an update on its QE programme but leave both deposit and refinancing rates unchanged. There is the possibility here for both the targeted duration and the scale of the QE (currently €60bn) to be reduced. The US Q3 GDP read on Friday is expected around 2.5 - 2.7% according to Bloomberg economists survey and the Atlanta Fed GDPNow model respectively. This is weaker than the 3.1% growth in Q2 but would be taken to be resilient given the effects of natural disasters during the period. If the read is closer to the NY Fed’s estimate of just 1.5% it may cause markets to reevaluate the quarter. There is also the possibility that we will hear Trump’s choice for the next Fed Chair with John Taylor, Janet Yellen and Jerome Powell being the most worthy and likely candidates.

Also this week, alongside earnings season at full flow, key data releases include: Chicago Fed National Activity Index; EC Consumer Confidence; numerous PMIs across all major markets; CPI from Mexico, Russia, Japan and Australia; some GDP data from Mexico, Korea, UK and US; and US durable goods and new home sales.

The Weekly Update

Away from the Turkey-US tensions last week, one of the main focus points for markets was the FOMC minutes, which confirmed expectations that interest rates could still be increased once more this year, despite the notable dovish tone. Lacklustre inflation remains a continual nag, as such the CPI data was watched very closely on Friday; both the headline and core numbers missed expectations. Off the back of weaker inflation readings US Treasuries rallied, with the yield on the 10-year benchmark down 9bps to 2.27%, and the DXY (dollar) Index fell 0.76%, pretty much wiping out any gains made during the previous week.

Jolts Jobs also disappointed to the downside, in August, while retail sales in September came in broadly in-line with market expectations. Meanwhile, frustration spread across the Trump-administration due to lack of development with the proposed tax-plan. Yellen said she expects inflation to move towards the 2% target next year. The fiscal policy shift, which was aggressively priced in post-Trump’s nomination, remains a ‘source of uncertainty’ she said, adding that the Fed maintains its ‘wait and see attitude’. Later today we will get the Empire Manufacturing release for October, markets expect this to have fallen. US import and export price indexes could also be interesting on Tuesday, followed by building and housing starts, and the Fed Beige book release on Wednesday.

Last week, the IMF bumped up its global growth forecasts to 3.6% in 2017 and 3.7% in 2018 (from 3.5% and 3.6%, respectively) as a result of further economic expansion in China, the US, eurozone and Japan. The Fund suggested that policymakers should take advantage of the current benign global economic environment to boost growth within their economies, as a protective measure against the next financial downturn. The IMF warned that wealthier nations should consider keeping monetary policy loose until inflation firms up. The Chief economist, Maurice Obstfeld said it best: ‘A closer look suggests that the global recovery may not be sustainable -- not all countries are participating, inflation often remains below target with weak wage growth, and the medium-term outlook still disappoints in many parts of the world’.

The IMF’s forecasts for China growth is 6.8% this year and 6.5% for 2018. Over the weekend the PBoC governor Zhou said he expects growth at 6.9%. He also highlighted concerns over corporate debt, adding that the central bank's priority is to deleverage and manage financial risks. Last week, the National Bureau of Statistics suggested that growth will come in higher than the government’s 6.5% target; this is not unexpected. A pick-up in manufacturing, along with significant policy shifts - including RRR cuts - coupled with China’s sustained high pace of growth and evolving economic structure have been cited as some of the reasons for sustained economic expansion. According to the Bureau’s Head, Ning Jizhe, Chinese President, Xi Jinping’s new development philosophy and supply-side reform have driven economic growth’ with the new economy accounting for just under 15% of GDP.

Exports and import data for September showed a marked improvement, suggesting foreign and domestic demand remains resilient. FDI also surprised to the upside, rising to the highest yoy level in two years; likely supported by robust hi-tech sector and manufacturing growth. Stronger FDI will also support the renminbi which had a strong week, the offshore currency was up 1.25% against the dollar. China’s 19th Party Congress kicks-off this week, recent stronger data will no doubt set a positive tone to the pivotal gathering. The Q3’17 GDP reading will be watched closely on Thursday; market expectations are for +1.7%qoq and +6.8% yoy. Retail sales, industrial production and fixed assets follow will also be released on Thursday; with all three readings expected to remain within range.

This week we may hear more from China on the USD2bn two-tranche deal; 5- and 10-year maturities, to be listed in Hong Kong. Interestingly, this is the first time the country has considered issuing dollar denominated debt in around 13 years; we therefore expect substantial demand for the highly rated A1 paper. With China’s domestic debt market the world’s third largest, at USD 9tn, we suspect the move to issue international bonds is to establish its own international yield curve; as part of opening up its bond market to foreign investors.

The IMF downgraded U.K. growth citing Brexit downside pressures. Last week the fifth round of talks ended with mixed reviews: Michel Barier said that insufficient progress and a state of ‘deadlock’ over the bill had been reached, adding that the EU would be able to cope with all eventualities, but a ‘no deal’ would be ‘very bad’ for the UK. PM May is to restart talks in Brussels later today, when she meets with Junker and Barnier; ahead of the EU summit.

Also this week, the deadline for the Catalan independence falls later this morning; we heard that Catalonia's President, Puigdemont wrote a letter to Rajoy where he stuck by the region’s right to declare independence. He added, ‘Our proposal for dialogue is sincere, despite all that has happened, but logically it is incompatible with the actual climate of growing repression and threat.’ Elsewhere, the IMF are said to be tallying up a deal to rescue Venezuela, despite the country (Hugo Chávez) cutting ties with the Fund and the World Bank back in 2007; according to those in the know, a restructuring of bonds and ~USD30bn annual injection are being discussed, North Korea's threat to launch another ballistic missile this week will undoubtedly result in a risk-off tone across markets. Markets will also be tuning in to the Japanese elections, this coming weekend.

The Weekly Update

The broader risk-on sentiment last week saw the S&P Index rally to new all-time highs, while the VIX Index, a measure of volatility traded below 10 through the week and closed at new lows on Thursday. The tone was driven by stronger US data and further hawkish comments from Fed members including: the pencilling in of a December hike and more positive outlook on US inflation (albeit it still below 2%), off the back of stronger growth. Employment numbers for September were not expected to rock the boat on Friday, due to the divergence of estimates resulting from the hurricane disruptions. However, despite the non-farm payroll figure actually coming in at -33k, unemployment upwardly surprised at 4.2% (from 4.4%) and average hourly earnings rose to 2.9% yoy. US Treasury yields spiked higher, to  2.4% off the ‘stronger’ report, however, simmered to 2.36% by close on Friday; after renewed US-North Korea tensions. Meanwhile, the dollar bounced 0.78%, measured by the DXY Index over the week. The probability of a hike in December climbed to 78.5% by the end of the week.

We expect a quiet start to this week as the US celebrates Columbus Day (equity markets are, however, open). Tuesday will see the Jolts Job openings (a constituent of GDP). On Wednesday the September FOMC minutes will be released; any change to rate hike forecasts will be of interest. PPI follows on Thursday and CPI readings out on Friday will grab some attention, as markets expect the yoy reading at 2.3% for September: driven by the pick-up oil prices, resulting from hurricane-damaged oil refineries. Retail sales estimates for September also appear more positive, compared with the disappointing August readings; the increase in motor vehicle purchases after damage to cars and trucks during the hurricanes to be a large driver of the positive numbers. The week will end on sentiment prints and business inventories. We could also hear more on the US tax proposal as the House passed a budget resolution last week, with a 219:206 majority vote. NAFTA talks will continue, with the fourth round expected to start on Wednesday. On Thursday Trump is scheduled to announce future policy on Iran; could be contentious given his previous comments regarding the current nuclear agreement. Fed chat will also be followed closely. Meanwhile, the IMF and World Bank will host their annual gathering to discuss matters including: economic development, finance and poverty.

Elsewhere, politics closer to home dominated newswires. The pro-Spain rally in Barcelona over the weekend saw the chances of a Catalonian independence declaration diminish. We expect to have more of an idea on the developments on Tuesday. Meanwhile, in the UK, PM May’s leadership came into question following her address at the Conservative Party Conference; infighting within the conservative party over the weekend has also put a strain on Brexit developments. Sterling suffered a ~2.5% fall against the dollar last week. Today will see the beginning of the fifth round of Brexit talks; this could be somewhat interesting after Germany and France warned that further clarity from the UK is required in order for negotiations to continue.

It was a quiet week for China with the country celebrating National Day holidays. This morning we saw the softer Caixin PMI composite and services readings for September, however, FX reserves bounced in September. The FDI yoy print later this week will be of interest as will the import and export data dump on Friday. Ahead of that the Chinese Communist Party’s 18th Central Committee will meet on Wednesday for the last time before the highly anticipated Party Congress, which kicks-off on October 18. Elsewhere in Asia, candidates running for Japan’s October 22 general election will officially kick-off their campaigns.

In terms of new issues, we added the 30-year Abu Dhabi sovereign bond: part of a three-tranche deal launched last week. Priced at a spread of 130bps over Treasuries, we calculated this Aa2 rated bond’s expected return and yield at ~17%, with over 4 notches of cushion. This is the first long-dated bond that the Kingdom has issued and as such, we saw significant demand for the deal; overall the USD10bn deal was 4 times oversubscribed. As the bond is rated investment grade by at least two rating agencies we expect it will be held across a number of indices. Not that that would influence us to hold such an issue, as we are not tied to any benchmarks, rather we have our own internal constraints which include limiting our investable universe to countries with NFA scorings of 3 and above. Abu Dhabi, for example, has a very high 7 star rating, and is investment grade; thus slots into our universe comfortably.

Also, last week, was the landmark meeting between Saudi Arabia’s King Salman bin Abdulaziz and Vladimir Putin; where everything from oil markets, investment and arms deals, to the Syrian war were discussed. The delegations penned $3bn worth of energy deals with the possibility of a collective $1bn energy investment fund and a $1bn Sibur plant in Saudi Arabia. Fostering friendship with Russia has become increasingly essential for Saudi Arabia given the increasing influence Russia has garnered across the Middle-East in recent years: not just through their involvement in the Syrian War but through a decade of actively building ties across the region. The talks should be an economic and political win for both players, furthering Russia’s strength in the region and bolstering Saudi Prince Mohammed’s “Vision 2030” economic transformation programme. Oil markets will be looking for any signals related to the crude production cut deal struck last December and news of extending the oil pact between the Saudi-led OPEC cartel and Russia.

The Weekly Update

A mixed week across asset markets was once again driven by geopolitics and central bank rhetoric. Yellen’s seemingly hawkish tones last week drove Treasury yields higher, this was furthered compounded by the proposed ‘revolutionary’ US tax plan. What concerns us is the tax plan’s eventual effect on the debt ceiling; we expect to hear more on this by year-end. Nonetheless, the yield on the 10-year US Treasury was up 8bps and the dollar gained momentum; the DXY Index closed the week 0.98% higher. Meanwhile, we heard further mixed messages from Fed members with those in acceptance of lowly inflation calling for further hikes, while others remained concerned of hiking too quickly with lacklustre price pressures. The futures market, however, received a wake-up call after Fed Chair Janet Yellen’s address, where she reiterated that a December hike is clearly a possibility. Gold unsurprisingly nosedived last week, meanwhile, Brent gained for its 5th straight week, closing at $56.79pb.

Mixed US data went pretty much unnoticed last week, this included: a very weak Chicago Fed reading and poor home sales month-on-month print for August, mixed sentiment in September, but a better than expected Dallas Fed September reading and positive pick-up in durable goods orders. The main data focus last week, however, was the third estimate for US Q2’17 GDP, which was upgraded to 3.1%yoy, and PCE deflator reading for August which did little to ease concerns over lacklustre US inflation, at 1.4%. This week will see a number of PMI and ISM readings for September; markets expect ISM manufacturing to have fallen in September to 58. This will be followed by the ADP reading for September on Wednesday and trade balance print and factory orders in August on Thursday; should be an interesting reading after the disappointing print in July. The much watched employment numbers end the week; interestingly, markets are looking for only 85k jobs created in September, most likely due to the hurricane disruptions. Away from data, we expect to hear more on tax reform and the Fed Chair selection is expected to start sooner than some had expected.

It was an exciting week for policymakers in China last week as they head towards the Party Congress this month. The State Council approved measures to centralise SOE financing funds: further progress in curbing the country’s non-financial debt burden and improving efficiency and transparency. Later in the week we heard that as of next year the Council is looking to target a cut in the reserve requirement ratio (currently ~17%), by 0.5-1.5% for banks providing financing packages for micro, start-up, agricultural businesses and small enterprises; in a bid to ‘boost employment, generate new growth opportunities and invigorate the economy’. The cabinet also extended the VAT exemption policy on micro companies (sales less than RMB 30,000) for a further three years. After the excitement of the industrial profits reading, up 24%yoy in August, and better than expected official PMI readings (manufacturing PMI hit five-year highs) we expect the week ahead to be pretty quiet as China enjoys a week-long National Day holiday.

Elsewhere, Brexit negotiations continued last week. EU’s Bexit negotiator Barnier did not inspire confidence warning that little in the way of ‘sufficient progress’ has been made; sterling had a rocky week as a result. With time fast running out, we expect to hear more on the developments in the coming weeks, although it appears that any trade deal discussions are currently out of arm's reach. We hope for some more clarity from the UK Conservative Party Conference this week. Datawise, the final reading for UK growth in Q2’17 missed market estimates, coming in at 1.5% yoy, meanwhile business investment in the second quarter surprised to the upside. Markit PMIs could  be of some interest this week.

Over the weekend the highly contentious Catalan plebiscite went through despite warnings from Madrid. There was a respectable turnout of voters, who unfortunately witnessed the distressing scenes of violence. With ~90% voting for independence, no doubt this will be an ongoing headline this week as Madrid throws constitutional laws at any independence announcement. The euro opened on the weaker side against the dollar this morning;  the currency could come under further pressure this week if the situation drags on as most expect. Today sees the final revisions to European manufacturing PMIs for September and August’s unemployment rate.

The Weekly Update

US-North Korea tensions continued to evolve last week, exacerbated by Trump’s bold comments at his first ever address at the UN General Assembly. Last week Trump also proposed a further set of sanctions on North Korea and Chinese president, Xi Jinping, ordered Chinese banks to cease all dealings with entities operating in North Korea. According to sources, Chinese banks have been told to halt all new financial services provisions to North Korean customers and wind down current loans. In a historic move, we heard that China will look to limit LNG and oil supplies to North Korea almost immediately, and stop importing the nation’s textiles (Pyongyang's second largest export). With threats coming from North Korea of a further H-Bomb launch into the Pacific, tensions are expected to remain heightened this week.

Away from the ‘Rocket Man’-’Mentally Deranged U.S. Dotard’ insults the big news was the FOMC meeting, where all was pretty much as expected. The Fed maintained short-term interest rates at 1-1.25% and officially divulged more information on the balance sheet unwind, which will commence in October. This has been well telegraphed in the lead-up to the meeting, in order to avoid shocking financial markets. What did surprise some market commentators however, is the fact that a December hike has been left on the table, despite the ‘mystery’ lacklustre inflation. In fact, the central bank’s inflation (PCE) forecasts were downgraded to 1.5% in 2017 (from 1.7%) and 1.9% in 2019, with the 2% mark pushed out to 2019. The long-run Fed Funds rate once again trended lower, to 2.75%, from 3% last December.

Later today we’ll see the August Chicago Fed National Activity Index release, which could be interesting after the disappointing July print. On Thursday, the Q2’17 GDP (third) reading could grab attention, markets have revised their expectations slightly, to 3.1%. Personal consumption and core PCE qoq releases follow. Friday will see the August PCE readings (Fed’s favoured inflation numbers), the consensus shows a marginal pick-up on the PCE deflator reading to 0.3%mom and 1.5%yoy. We expect to hear more on the US’ tax reform proposal in the upcoming weeks; this week the ‘group of six’ are reportedly meeting to formulate a tax plan to kickstart the process with Congress. Over the weekend we heard that a cut to 20% is being discussed, despite Trump calling for a 15% rate.

Elsewhere, citing an increasing debt burden, S&P downgraded China’s long-term rating by one notch to A+, bringing it in-line with the other two main rating agencies (A1 and A+); this is the rating agency’s first downgrade to the country since 1999. Market reaction was muted post the announcement, which suggests asset classes already priced in the downgrade. The reaction was definitely starkly different from the sell-off witnessed after Moody’s downgraded China in May. Off the back of this downgrade, expectations are for policymakers to implement supportive policies, if necessary, ahead of the highly anticipated party congress in a couple weeks. Over the weekend, authorities announced further property tightening measures including: banning sales of new and existing properties in several large cities, and increasing the mortgage rate for first-time buyers in Beijing by 5-10%. Another quiet week in terms of data will see the industrial profits reading for August on Wednesday, Q2’17 balance of payments reading on Thursday and Caixin manufacturing PMI on Friday.

Over in Europe, German elections took place over the weekend, Angela Merkel was re-elected for a fourth term, but her party witnessed its worst election outcome in ~70 years. The euro has started the week on the back foot, expectations are for the currency to remain under pressure as coalition discussions continue through this week. September German IFO readings released this morning disappointed which did little to temper sentiment. Eurozone confidence prints for September will be released on Thursday, followed by CPI on Friday. Meanwhile, Theresa May’s address in Florence last Friday was pretty much a  non-event, as her Brexit blueprint was thin on detail. What did grab market attention was Moody's one notch downgrade to the UK’s long-term rating, to Aa2. The final reading of UK’s Q2’17 GDP on Friday will be of interest; expected at 0.3%qoq and 1.7% yoy.

The Weekly Update

Markets witnessed improved sentiment last week; the S&P index closed at all-time highs on Friday. US Treasury yields rose last week, with the 10-year up 15bps, at 2.20%. The US dollar ended the week on the front foot; the DXY Index was up 0.57%. Meanwhile, oil rallied, Brent rose 3.42%; OPEC production reportedly fell further in August and figures suggest global demand is picking up.

Key US data included inflation readings for August; PPI was softer-than-expected and CPI surprised to the upside, at 1.7%yoy. The week ended with a stronger-than-expected Empire Manufacturing reading, but, retail sales disappointed, having broadly fallen in August; the sales control group reading (a component of GDP) was down 0.2%. There's not much in terms of key economic data releases, so focus this week will be on FOMC meeting on Wednesday. We do not expect any material change to interest rate policy (as inflation remains below target), however, an announcement regarding the timing of the balance sheet unwind is anticipated.

We may also receive more colour regarding the Republican-only tax reform ‘template’ this week. Existing home sales releases for August should be of interest ahead of the central bank meeting (especially after July’s weak mom print), and the week will end with the three Markit PMI readings. The annual UN General Assembly may garner some attention on Tuesday, especially after North Korea launched another missile last week - over Japan in retaliation to what it termed ‘illegal and lawful’ US Sanctions. Over the weekend, US Secretary of State said ‘our military option will be the only one left’ if diplomatic efforts with North Korea fail. He did however add that ‘we seek a peaceful solution to this’.  

China spending and activity data prints were broadly softer in August, we maintain our expectations for growth in H2’17 to come in-line with the PBoC’s 6.5% growth target. Meanwhile, the renminbi re-traced some of its gains from the previous week in response to the stronger dollar and regulatory adjustments. The offshore currency is still up against the dollar this month. The only bit of data that may be of interest this week is China’s FX settlement release.

UK inflation surprised on the upside at 2.9%yoy with the core reading at 2.7%, PPI readings also beat market expectations. Inflation data was released ahead of the BoE policy meeting, where, as expected, the CB maintained policy. However, the meeting minutes suggest that the majority of committee members back a rate hike in the near future if the economy continues to perform as expected, with all members agreeing that markets are underpricing future rate hikes. It seems the only spanner in the works could be the ongoing Brexit negotiations. Sterling enjoyed a ~3% rally against the dollar and 3.75% against the euro over the week. While 10-year Gilts spiked 32bps to end the week at 1.305%. This week markets expect softer retail sales figures for August, there is not much else in terms of key data. We expect focus to shift to Theresa May’s Brexit speech in Florence, on Friday, where she is expected to ‘underline the government's wish for a deep and special partnership with the EU once the UK leaves’, according to her spokesman.

Staying with the EU, we heard further hawkish tones from the ECB last week. Also last week, S&P upgraded Portugal to investment grade (BBB-) citing an improved budget deficit. We would still not invest in the country as we assign Portugal only a 1 star NFA ranking. The main event in Europe this week will be the elections in Germany, on Sunday.