Last week witnessed further ‘upbeat’ central bank rhetoric as markets continued to cling onto even the slightest bit of optimism. The BoC hiked, as expected, by 25bps to 0.75% (with a continued hawkish stance). Meanwhile news reports suggested the ECB would look to begin tapering next year; following a September announcement. Also, the BoE’s McCafferty’s hawkish comments saw 10-year Gilt yields move higher.
However, the main focus for markets last week was Fed Chair Yellen’s testimony to Congress on semi-annual monetary policy; where she appeared more dovish than expected. Although ‘transitory’, Yellen confirmed that inflation remains well below the 2% target, adding that ‘there could be more going on there’. She also highlighted concerns over ‘uncertainty about when - and how much - inflation will respond to tightening resource utilisation’. As for future rate hikes, from the sounds of it the central bank sees no urgency or necessity to hike, we expect Fed Funds rates to remain lower for longer; as the central bank strives to achieve a balanced dual mandate. Following the testimony, the futures market repriced its expectations for another hike this year, the probability of a move in December fell below 50%. Off the back of Yellen's testimony on Wednesday the DXY (dollar) Index slid to year lows, weak data prints did little to stabilise the greenback, which fell almost 1% over the week.
US data was once again broadly disappointing: JOLTS jobs missed expectations in May, April’s reading was also revised lower. PPI and CPI readings on the whole missed expectations; CPI came in at 1.6% yoy in June, while the core reading remained stable at 1.7%. Retail sales also missed market calls, with the control group (a component of GDP) actually falling in June. US Treasuries rallied off the back of this and the yield on the 10 year closed 6bps lower, at 2.33%. This week will be light in terms of key data releases. However, one to watch could be today’s Empire Manufacturing reading, which is expected to have fallen this month. On Wednesday, housing starts and building permits will also grab some attention as the market expects a bounce in June and the week ends with the Bloomberg Consumer confidence. With little in the way of Fed chat, market focus will no doubt turn to the BoJ and ECB policy meetings on Thursday; where taper details are expected at the latter.
China data once again surprised to the upside, with FDI bouncing +2.3% (in CNY terms). Export and import data was also positive, beating market expectations at +11.3% and +17.2%, respectively; the trade balance was marginally unchanged at USD 42.08bn. The renminbi enjoyed a rally against the dollar, with CNY gaining 0.44% on the week. Rating agency Fitch reaffirmed China’s rating at A+. This morning saw strong key data releases from China: Q2’17 GDP beat expectations at 6.9%, retail sales, industrial production and fixed assets were also strong in June. The resilient data will allow policymakers further space to maintain the deleveraging programme. The rest of the week is pretty quiet, ahead of June industrial profits on Thursday.
Other good news last week came from Qatar; which was the regional outperformer as investors continued to add risk; particularly at the longer end of the curve. Our sovereign and quasi-sovereign holdings rallied over the week following US Secretary of State, Rex Tillerson’s comments on the ‘very reasonable’ position of Qatar, and the signing of (an apparently year-in-the-making) memorandum uniting their commitments against terrorism and terrorism financing. As Qatar continues to make reasonable (internationally recognised) concessions on the most important issues this adds further pressure for the countries leading the boycott to concede on their more prejudice demands. A full resolution is still going to take time, no one is expecting an immediate breakthrough. First, the agreement with the US doesn’t have any implications for the influential and contentious Al Jazeera. Second, it clearly does not mean withdrawing involvement in the Gaza Strip; Qatar also affirmed their continued support of development and reconstruction projects in the Hamas controlled region. However, with these developments and the likes of Tillerson (and Boris Johnson) throwing their weight behind the mediations a reasonable resolution is starting to take shape.
With the recent rally, the region’s bonds are now trading around year-to-date averages and according to our proprietary model still offer significant relative value for Aa3 rated bonds from the richest country per capita in the world. Qatar’s underlying fundamentals, its constrained engagement with the spat thus far, the mutual benefit to all of a resolution and now the increasing international support for swift mediation add further support to our confidence in the region.