The Weekly Update

US Treasury yields fell 5 basis points last week, which was just enough to bring them below 3% to close out November.  The November FOMC Minutes emphasised that ‘monetary policy was not on a ‘preset course’, it should be ‘guided by incoming data’ and that ‘a gradual approach’ remained appropriate. Another 25 basis point hike in the Fed Funds target range in December still looks extremely likely as ‘almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon’ assuming no drastic change in the job and inflation data.

A ’flexible approach’ seems to be the order of the day with many participants noting that the statement language may need to be amended to emphasise this and the ‘evaluation of incoming data’. Importantly, ‘a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its ‘neutral level’. Indeed, Jerome Powell’s speech at the Economic Club of New York earlier in the week gave a sense of a more cautious approach to rate rises than his October comments noting this time interest rates ‘remain just below the broad range of estimates of the level that would be neutral for the economy’ and he acknowledged that the economy is still to feel the full effects of the previous tightening hence they ‘will be paying very close attention to what incoming economic and financial data are telling us.’

This weekend we saw a thaw in the ongoing trade disputes between the world’s biggest economies, as US President Donald Trump and his Chinese counterpart Xi Jinping agreed to a temporary truce on trade disagreements at the G20 summit in Argentina. The pair agreed to stop all new trade tariffs for 90 days to allow for talks, whilst Trump agreed to maintain the 10% tariff on USD200bn worth of goods, not raising them ‘at this time’ ahead of the deadline on the 1st January 2019. In exchange, Jinping agreed China would purchase a ‘very substantial’ amount of energy, agricultural and industrial products from the US. Although the meeting between the two leaders was seen as ‘friendly and candid’, from the Chinese side at least, according to a White House statement, if both parties fail to come to an agreement within the 90 days the 10% tariffs will rise to 25%.

Equity markets also advanced last week: in Europe following the EU’s validation of the Brexit withdrawal and hints Rome may backtrack on their budget; and in the US on news of the Fed’s more accommodative stance. The S&P bounced +4.9% and the Nasdaq was up +5.6% as markets considered if the Fed might pause the tightening cycle next year with tech stocks with Amazon recovering +12.5% last week after stellar “Black Friday” sales which followed two gloomy weeks for the stock. Japanese equities also performed well with the TOPIX up +2.4% on the back of positive outlooks for the Fed and also US-China talks.

Technically Brent crude closed out its eighth consecutive down week closing on Friday at $58.71 per barrel down -0.15%. But after the -12% fall last week prices appeared stable and may bounce into next week given expectations OPEC will cut output at their meeting next Thursday to balance the estimated 1.5 million barrels per day surplus at present.

Highlights for next week on the economic calendar include: Manufacturing PMIs in US, China, UK and Eurozone on Monday and Servicers PMI on Wednesday; OPEC’s 175th Ordinary Meeting runs from Wednesday to Friday in Vienna; focus on Friday will be on US Non-Farm Payrolls and hourly earnings with Germany and France Industrial Production and Eurozone Q3 GDP also.

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