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.
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.
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.
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.
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.
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.
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.