Geopolitics commanded market focus once again last week as North Korea launched another two ballistic missiles. The first was launched over Japan - on the 107th anniversary of the ‘Japan-Korea Annexation Treaty’- with the second, a purported hydrogen bomb, resulting in an earthquake with a seismic magnitude of 6.3. We expect US-North Korea tensions to remain elevated this week.
US Treasury yields rallied to year lows during the week, however, sentiment reversed into the end of the week off the back of broadly positive data out of the US, Europe and China, amongst others; the 10-year UST benchmark ended flat over the week, at 2.167%. The dollar also collapsed, to year lows, during the week but picked up pace into Friday's close, up 0.08%. Following the ‘dovish’ and relatively unexciting Jackson Hole Symposium, where little in the way of new policy information was divulged, markets once again turned to US data releases; where the week ended with the closely watched employment data dump. Before that however, the second estimate for Q2’17 US growth was released at 3%qoq annualised, revised up from 2.6%. However, the next key reading, the PCE deflator disappointed at 1.4% yoy. Friday ended with a slew of data including employment and ISM readings. As with the previous 6 rounds of non-farm readings for August, the most recent continued to disappoint. It appears however that markets are less concerned with the employment side of the Fed’s dual mandate, while inflation continues to cause concern. One thing of note was that average hourly earnings dipped both on a month-on-month and year-on-year basis; which certainly won’t encourage the inflation outlook. The ISM readings for August, however, surprised to the upside; the manufacturing index bounced to 58.8.
One could open this week’s outlook commenting that markets may be more active with the summer behind them, however, it feels as if this past couple of months has kept most investors on their toes. Expect a quiet day today, however, with the US out celebrating Labour Day. The final readings for July factory orders and durable goods will be of interest on Tuesday, especially as the market is calling for a fall in the former, by -3.2% (versus +3% in June). This will be followed by Markit PMIs, ISM data and the Fed’s Beige Book on Wednesday. The rest of the week is pretty quiet in terms of key economic data. However, as Congress returns from its recess on Tuesday, markets will be looking for further updates on the US’ tax reform, budget and the debt ceiling debate in the coming weeks.
Tax reform announcements will grab market focus especially after Treasury Secretary Mnuchin - who along with Trump wishes to see corporate taxes cut to 15%, - warned ‘this is our once-in-a-generation opportunity to deliver real tax reform…I don’t want to be disappointed by Congress – do you understand me?’ Also, as has been well publicised, Mr Trump has been tweeting threats of a government shutdown if funding for the infamous ‘wall’ is not agreed. However, it has been reported, over the weekend that the president will instead look to seek funds for the tropical storm Harvey relief programme. During the week S&P warned ‘failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery’. US trade relationships and agreement could also come into play this week after it was reported over the weekend that Trump discussed pulling out of the trade agreement with South Korea, later adding that the US is looking at ‘stopping all trade with any country doing business with North Korea’.
Elsewhere, the renminbi rallied to a 15-month low against the dollar last week. As of Friday's close, the offshore currency has appreciated 4.39% against the greenback on a spot basis so far this year; and 9.52% on a total return basis. The currency has continued to trade stronger against the CFETS basket last week, suggesting that the renminbi’s appreciation has less to do with dollar weakness. In the coming week, as the US-North Korea tensions remain heightened, the renminbi could witness further safe haven flows; being a large net creditor. Also, the dollar yield may witness further downward pressure, increasing the USD-RMB yield differential; further increasing the appeal of the Chinese currency.
On the data front, the official readings for China’s manufacturing PMIs surprised to the upside in August, the Caixin Manufacturing PMI reading for August also beat expectations, released at 51.6, well in expansionary territory. In another thin data week, the composite and services PMI’s will be announced on Wednesday followed by fx reserve data later on in the week; expected to have grown to USD 3,095 bn.
Over in Europe, the euro continued to ‘overshoot’ rocketing past the 1.200 mark against the dollar last week. Although it closed the week at 1.186, it is still up 12.77% against the greenback so far this year. Eurozone core inflation at 1.2% is hardly going to cause a stir at the ECB meeting this Thursday. Lacklustre global inflation is expected to remain a market theme into the end of the year.