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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