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.