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.