The Weekly Update

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.

So, another exciting week for markets which also witnessed a brief moment of panic after newswires suggested that Chinese policymakers were investigating a renminbi devaluation. As this was part of an exercise evaluating options to mitigate the potential effects of worst-case scenario US tariffs, fears were very quickly diminished. At the Boao Forum, PBoC Governor stated that China would not devalue the renminbi which helped underpin the currency; the offshore unit gained 0.64% over the week. Also of note was the US Treasury FX report which once again did not label China or any of the other watchlist nations as currency manipulators, however, added India to the monitoring list.

There were also concerns over Russian bonds which had sold-off considerably last week following further sanction news. We are holders of two hard currency, investment grade, quasi-sovereign companies: Gazprom 8.625% 2034s (USD) the state-owned global energy company and Russian Railways (RZD) 7.487% 2031 (GBP) a 100% state-owned rail transport provider. Neither issue is subject to western sanctions. We do not have any exposure to RUSAL, a sub-investment grade rated company, neither have we ever held it. We continue to monitor the situation as it evolves, searching for rotation opportunities. However, the outlook appears volatile, especially with the ongoing conflict in Syria. We continue to believe that our holdings offer attractive risk-adjusted returns and that the sell-off was overdone across the sovereign/quasi-sovereign space; just as it was for the stock market, which has recovered somewhat.

Aside from a number of Fed speakers this week, the key events are US retail sales release later today and China GDP prints on Tuesday. Meanwhile, EU members gather today to discuss the ongoing Syrian situation, Russian relations and the Iran nuclear deal, amongst other key topics. Later today SpaceX will launch the NASA TESS satellite, its mission: to search for life. Datawise the US retail sales and Empire manufacturing will garner market attention. Tuesday kicks-off with the China GDP prints; market expectations are for +6.8% yoy growth. We will also get China's retail sales and activity data readings for March. In the US we will see last month’s housing starts and building permits data. President Trump and Japan’s Abe meet on Tuesday, we expect North Korea and trade chat will dominate discussions. The IMF and World Bank Spring meetings will be watched closely; through to April, 22. UK CPI, the Fed’s Beige Book and Japan trade data are as exciting as the diary gets on Wednesday. Things could pick up on Thursday as Germany’s Merkel and French President Macron discuss EU reform and US trade conflict ahead of talks with Trump next week. Friday could be a relatively quiet day with little in the way of key data releases. Ongoing geopolitical events will also be keenly watched this week as will further global trade rhetoric; with ongoing NAFTA negotiations and the potential release of the US’s USD100bn China products tariff list.

The Weekly Update

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”. Then just when we thought the dust had settled, Trump suggested listing a further USD 100bn worth of goods subject to 25% tariffs in response to China’s alleged “unfair retaliation”, with China looking to do whatever it takes and fight “to the end at any cost” in the face of US actions. The release of the US’s trade deficit, which had jumped to a 9.5 year high in February did little to calm market nerves, however, we believe there really is no positive outcome for either economy if they engage in a trade war, and remain convinced that current posturing will eventually end with a reasonable compromise; we continue to monitor the situation ahead of the final USTR approval on May 15.

The all-important US job report was broadly weaker-than-expected with only 103k jobs added (versus +185K consensus) while unemployment remained at 4.1% (vs 4%) and the participation rate decreased marginally; the labour market clearly remains strong and has proven to do so for some time now. Average hourly earnings are therefore the focal point for markets; both the month-on-month and year-on-year readings were in-line with expectations at 0.3% and 2.7%, respectively.  US Treasuries rallied off the back of the softer jobs data. In terms of Fed rhetoric, Atlanta Fed’s Bostic said he expects inflation to pick up to target within the next couple quarters and would not mind an inflation overshoot above 2%, adding that he is still looking for three hikes this year. Broadly, Fed members agree to maintain a gradual approach to rate hikes and feel it is too early to estimate the impact of proposed tariffs on the economy. All eyes were then on Powell following the jobs report, he once again stuck to the script reiterating the above approach to tightening, adding that he expects upside pressures to wage growth as the labour market strengthens further.

USTs therefore enjoyed an interesting ride over the course of the week eventually closing 3bps higher at 2.77%, while the dollar managed to find some ground with the DXY Index up 0.15%. Meanwhile, the offshore renminbi fell 0.77% against the greenback off the back of increased trade tension concerns and the yen was down 0.61%. The schizophrenic equity market sold-off again last week, the VIX spiked and growth related commodities had an uneasy week.

Aside from weaker-than-expected EU PMIs and UK economic data prints for February markets were politically focused; there were also a number of market players out enjoying the extended Easter break. Activity could pick up this week with: the release of China and US CPI and PPI readings, the Fed minutes release and various BoJ, ECB and Fed members speaking. Facebook’s Zuckerberg testimonies could also draw some attention on Tuesday and Wednesday. We will also hear from China President Xi at the Boao forum (or Asia’s Davos), many expect Xi will discuss the opening up of China’s financial markets in the face of trade tensions. The US Congressional Budget may also give some colour on upcoming Treasury issuance, which has added downward pressure to yields, especially at the shorter-end.

Today will see the IMF’s World Economic Outlook and we will hear from Japan Governor, Kuroda, as he begins his second term. Interestingly, John Bolton will take his position as US national security adviser later; he was once referred to as “human scum and bloodsucker” by North Korea, so it will be interesting to see how the meeting between the two nations will pan out next month, assuming it still goes through. Tuesday kicks-off with Italy and France IP prints and later we will get the US PPI readings. Markets could perk-up on Wednesday with the China CPI and PPI data, UK IP, followed by US CPI data; Bloomberg currently has the month-on-month core reading at 0.2%, and  2.1%yoy. The Fed minutes from March’s meeting could be of interest following the 25bps hike. With little data and activity expected on Thursday, markets will be looking to Friday’s China trade data releases and US JOLTS report. Mr Trump’s South America trip will see him attending the Summits of the Americas where he hopes to announce a NAFTA agreement; developments will be watched closely through the week. No doubt the ongoing trade games will continue to command market attention.

The Weekly Update

The Weekly Update

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.

The Weekly Update

The Weekly Update

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.

The Weekly Update

The Weekly Update

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.

The Weekly Update

The Weekly Update

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.

The Weekly Update

The Weekly Update

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%.

The Weekly Update

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.

The Weekly Update

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.

The Weekly Update

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 Weekly Update

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 Weekly Update

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 Weekly Update

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.

The Weekly Update

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.

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.

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