The Weekly Update

The main focus last week was on the FOMC meeting, where as widely expected the Fed increased rates by 25bps to 1%-1.25%. As markets had been expecting a hike since March, they were more focused on the future trajectory of hikes and of course the balance sheet taper details. Some further details were given on the USD 4.5tn balance sheet, with the Fed’s ‘caps’ for the monthly portfolio run-off to be set at $6bn in Treasuries and $4bn in MBS. A number of Fed officials have said the run-off programme could run until the balance sheet shrinks to USD 2-2.5tn; bear in mind the pre-financial crisis balance sheet stood at a ‘mere’ USD 800bn. No official start date was mentioned however the market expects a September announcement with Fed Chair Yellen, stating the plan could be implemented 'relatively soon'. On the rate path, the majority of Fed members have forecast one more rate hike this year.

With benign US inflation still on everyone’s minds, the central bank noted the recent decline and revised its core PCE forecasts lower to 1.7% (from 1.9%) adding however, that it will not let data ‘noise’ prevent it from continuing on its course of normalisation. Data noise did however impact the market ahead of the FOMC meeting; weak retail sales readings in May and the disappointing CPI releases for example saw the 10-year UST yield fall to year lows of 2.10%. The broadly hawkish post-hike Fed tone did see yields drift slightly higher, but the week ended with weak housing data and the largest drop in the Michigan consumer confidence since October 2016, coupled with dovish inflation comments from Fed members Kashkari and Kaplan, resulting in lower UST yields; the benchmark 10-year ended the week 5bps lower at 2.15%. A less data heavy week ahead sees the release of Q1’17 current account balance later today, existing home sales for May on Wednesday, followed by Markit PMI data on Friday. There will also be a number of Fed members speaking this week; markets will be looking for any further clues on the balance sheet normalisation program and indications for a September hike.

Meanwhile, China data for May was released broadly in-line with market expectations; retail sales, for example, was up 10.7% yoy in May and FDI. The IMF upgraded its growth forecast for China to 6.7% for this year and 6.4% until 2020 highlighting that the country’s current stable growth gives policymakers room to press on with economic reform, adding that ‘some near-term risks had receded’. As the Chinese economy remains stable and FX reserves have increased, Beijing announced that its holdings of US Treasury securities have risen to a six-month high. With the renminbi maintaining stability against the recent volatile dollar, coupled with Beijing's push to deleverage, the PBoC did not move to lift OMO rates in-line with the the Fed move. Looking ahead this week, there is not much in the way of key economic data, however, investors will be focused on the MSCI decision on Tuesday where the index provider will announce whether or not it will be including China’s USD 7tn A-Shares within its emerging market stock index.

Elsewhere, Qatari bond yields ended the week slightly lower, as there was no material change to the Qatar-Gulf diplomatic dispute; the longer-end of the yield curve is roughly 3 points higher from June-lows. Although the news flow is limited, the general feeling is that a negotiated settlement, lead by Kuwaiti leaders, is best for all parties. Over the weekend Qatar also stated that it will keep pumping gas to the UAE ‘ who are considered like brothers’.

With the data light week ahead, events such as the commencement of Brexit negotiations, today, and the Queen’s speech on Wednesday, will dominate market focus. Also as mentioned MSCI is due to consider China, and Saudi Arabia, South Korea and Argentina for inclusion in its Emerging Market Index, the latter three being on a watch list. As the index is considered the most ‘important index provider’, any decision made regarding the former countries will no doubt have a huge impact on their stock markets.