The Weekly Update

Markets witnessed improved sentiment last week; the S&P index closed at all-time highs on Friday. US Treasury yields rose last week, with the 10-year up 15bps, at 2.20%. The US dollar ended the week on the front foot; the DXY Index was up 0.57%. Meanwhile, oil rallied, Brent rose 3.42%; OPEC production reportedly fell further in August and figures suggest global demand is picking up.

Key US data included inflation readings for August; PPI was softer-than-expected and CPI surprised to the upside, at 1.7%yoy. The week ended with a stronger-than-expected Empire Manufacturing reading, but, retail sales disappointed, having broadly fallen in August; the sales control group reading (a component of GDP) was down 0.2%. There's not much in terms of key economic data releases, so focus this week will be on FOMC meeting on Wednesday. We do not expect any material change to interest rate policy (as inflation remains below target), however, an announcement regarding the timing of the balance sheet unwind is anticipated.

We may also receive more colour regarding the Republican-only tax reform ‘template’ this week. Existing home sales releases for August should be of interest ahead of the central bank meeting (especially after July’s weak mom print), and the week will end with the three Markit PMI readings. The annual UN General Assembly may garner some attention on Tuesday, especially after North Korea launched another missile last week - over Japan in retaliation to what it termed ‘illegal and lawful’ US Sanctions. Over the weekend, US Secretary of State said ‘our military option will be the only one left’ if diplomatic efforts with North Korea fail. He did however add that ‘we seek a peaceful solution to this’.  

China spending and activity data prints were broadly softer in August, we maintain our expectations for growth in H2’17 to come in-line with the PBoC’s 6.5% growth target. Meanwhile, the renminbi re-traced some of its gains from the previous week in response to the stronger dollar and regulatory adjustments. The offshore currency is still up against the dollar this month. The only bit of data that may be of interest this week is China’s FX settlement release.

UK inflation surprised on the upside at 2.9%yoy with the core reading at 2.7%, PPI readings also beat market expectations. Inflation data was released ahead of the BoE policy meeting, where, as expected, the CB maintained policy. However, the meeting minutes suggest that the majority of committee members back a rate hike in the near future if the economy continues to perform as expected, with all members agreeing that markets are underpricing future rate hikes. It seems the only spanner in the works could be the ongoing Brexit negotiations. Sterling enjoyed a ~3% rally against the dollar and 3.75% against the euro over the week. While 10-year Gilts spiked 32bps to end the week at 1.305%. This week markets expect softer retail sales figures for August, there is not much else in terms of key data. We expect focus to shift to Theresa May’s Brexit speech in Florence, on Friday, where she is expected to ‘underline the government's wish for a deep and special partnership with the EU once the UK leaves’, according to her spokesman.

Staying with the EU, we heard further hawkish tones from the ECB last week. Also last week, S&P upgraded Portugal to investment grade (BBB-) citing an improved budget deficit. We would still not invest in the country as we assign Portugal only a 1 star NFA ranking. The main event in Europe this week will be the elections in Germany, on Sunday.