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.

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