Last week witnessed another dramatic week in the White House. Mr. Trump managed to offend a number of Americans with his handling of the unfortunate incident in Charlottesville, with the last bullet in the foot resulting in the disbandment of his business councils which were initially set up to advise Trump on economic policy and agenda. Although the expectedly dovish notes from the FOMC July minutes were ‘blamed’ for the move lower in the dollar and US Treasury yields on Wednesday, it appears the market is becoming increasingly concerned about the US presidential administration. Incidentally, White House’s chief strategist, Bannon resigned on Friday. US Treasury yields were marginally higher over the week at 2.195%, despite trading as high as 2.28% mid-week. Going back to the Fed, the much talked about lowly inflation continues to split central bank opinion; the market is not pricing in a high chance of a Fed hike this year as a result, and expectations for the balance sheet unwind are unchanged, a September announcement is expected.
There were a number of key US data releases for July and August, which were unfortunately overshadowed by the in-house politics. Retail sales gained pace in July (alongside an upward revision in June), the control group reading, a component of GDP, was up 0.6%, versus expectations for +0.4%. Empire manufacturing also surprised to the upside at 25.2 in August, from 9.8 previously. Housing starts and building permits on the other hand disappointed, with single- and multi-family homes (apartment buildings) leading the decline. Despite ongoing turbulence in the US, business sentiment remains robust. Today kicks off with the Chicago Fed National Activity Index; which had spiked higher in June, Markit PMIs follow on Wednesday and Friday July durable goods orders will be of interest.
Elsewhere, the IMF revised its growth forecasts for China to 6.4%, from 6.0%, through to 2020. The IMF estimated that government, corporate and household debt could increase to 300% of GDP by 2022, from 242% in 2016 adding, ‘Given strong growth momentum, now is the time to intensify these deleveraging efforts’. Chinese debt to GDP ratios are frequently used to support a negative outlook for the renminbi, with some observers citing the country’s debt at 250% of GDP currently; which is indeed high. However, these ‘estimates’ are also misleading they do not take account the assets on the other side of the balance sheet. On the previous basis, the US debt to GDP ratio is 331% of GDP. If one focusses solely on government debt, the figures look very different. Using IMF forecasts for 2022, China’s government debt will stand at 58.9%, which is far lower than most other countries. The Chinese renminbi was relatively flat over the week. As of Friday’s close, we calculate that the carry on the offshore currency stands at 3% year-to-date, with total return at 7.40% against the dollar.
With a pretty thin data week ahead, focus will fall on the Jackson Hole gathering, starting on Thursday; it will be interesting to see if ECB President Draghi will discuss QE, especially there have been a number of conflicting reports. We may have more of an idea where Super Mario stands in regard to tapering and the ‘euro overshoot’ on Wednesday, when he speaks at a symposium in Lindau, Germany. Fed Chair Yellen is said to be discussing financial stability at Jackson Hole, on Friday. Also later today Trump will discuss America’s strategic path ahead in Afghanistan and South Asia; almost 16 years after the war started. Of course the US-North Korea situation will be monitored closely this week as both sides undergo military drills.