The Weekly Update

Geopolitical tensions between the US and North Korea ramped up last week; silver (+5.2%), gold (+2.4%), the yen (+1.37%), Swiss franc (+1.13%) and US Treasuries were the main beneficiaries of the risk-off market tone last week. The yield on the 10-year UST fell 7bps to 2.19%. The dollar (DXY Index) on the other hand came under pressure, falling 0.51% over the week. Equity markets broadly fell over the week, and the VIX (volatility) Index spiked ~55% over the week; and hit an intraday high of 17.28 on Friday. Meanwhile, the renminbi, considered a ‘hedge’ by some, was the top performing EM currency against the dollar last week; CNH gained 0.88%.

Elsewhere, further dovish tones from Fed members dominated newswires. The general theme appears to be for a break in rate hikes this year, and a focus on unwinding the massive balance sheet as a tightening tool. Inflation, or lack of, remains on members’ lips, as it continues to ‘surprise to the downside’ Bullard said, adding that rates should be left where they are for the time being. He went on to say that he is ‘ready to get going in September’ for balance sheet tightening which he expects will be ‘very slow’ with little impact on the markets. Kashkari, also concerned about lowly price levels highlighted that the Fed wishes to ensure investors have faith in the central bank stating, ‘it actually matters that investors believe the Fed can achieve its goals, because then if there’s a future crisis and we really need people to believe in us, we’ve earned and established that credibility.’ In terms of data, the JOLTS reading bounced to an all-time high in July, breathing some life into the dollar. PPI releases broadly disappointed, with -0.1%mom core print missing expectations, the 1.8%yoy reading also fell from June levels. A bounce in the consumer confidence readings saw the dollar spike higher on Thursday, as did the monthly budget statement; where the budget deficit was better than expected in July, at USD 43bn. The much awaited CPI releases for July remained soft, further underscoring concerns over when the Fed’s 2% target will be met.

This week will see import and export indexes for July, and Empire Manufacturing later today, the latter is expected to come in slightly higher in July. Retail sales will grab market attention, especially as previous June readings had disappointed. Housing starts and business permit prints, followed by the FOMC minutes from last month’s meeting will be released on Wednesday; we expect the minutes will remain sharply unchanged. Sentiment and confidence readings on Thursday and Friday could be interesting, as they remain largely mixed.

Elsewhere, although China’s exports and imports dipped slightly in July the  readings remain robust and had little impact on markets. CPI was marginally softer on July at 1.4% yoy and PPI was unchanged at 5.5%, so again nothing to write home about. The stronger than expected fx reserve reading in July, however, nudged the renminbi higher. Key activity data from China featured this morning: retail sales, fixed assets and industrial production releases all softened last month, there are thus concerns that Q3’17 growth may dip slightly. However, policymakers have reiterated they are willing to accept that softer growth, around 6.5%. There is little more in the way of key data releases for the rest of the week. However, geopolitical concerns with neighbouring North Korea and India may continue to hold market focus.