The Weekly Update

Another mixed week saw the yield on the 10-year UST close 18bps higher at 2.84%, and the yield on the 30-year spiked above 3%. Concerns of sovereign oversupply, strong Q4 unit labour costs, a robust ISM (especially prices paid) reading and a strong December employment report were some of the causes for the continued sell-off. Friday saw the employment dump for January, unemployment was unchanged at 4.1%, however, the more closely watched average hourly earnings beat market expectations, at 2.9% yoy (the fastest pace since 2009) which led to a push higher in yields across the UST curve.  

The FOMC meeting saw Fed Chair Yellen hand the reins over to Jerome Powell. Described as somewhat dovish and cautious, it will be interesting to see if Yellen’s departure will lead to a change in rhetoric from the central bank; although we understand that Powell is expected to follow in Yellen’s ‘gradual’ footsteps, the easing of financial regulation may become a hot topic. The futures market is pricing an almost certain 25bps hike in March; and still only three rate hikes despite evidence of full employment and less lacklustre inflation. Despite the dollar bounce following the marginally better-than-expected employment numbers, the offshore renminbi continued its appreciation, gaining a further 0.21% against the greenback last week.

There is little in the way of key economic data this week, market focus will, therefore, turn to the ECB meeting on Thursday, although no change to rates is expected; with the recent mixed rhetoric, it could be interesting to see where forward guidance lies. Also on Thursday, with new no spending bill in sight, the US will face another potential government shutdown; no doubt another short-term funding deal will be announced.

Ahead of that, on Monday we will get a number of PMI readings from the EU and UK, and non-manufacturing ISM print in the US, and Mario Draghi will present his annual report to the European Parliament. The US trade deficit reading could be of interest on Tuesday, as Bloomberg estimates the gap could have widened to a nine-year high. On Thursday we will also hear from the BoE, on rates and inflation; the benchmark rate is expected to be kept at 0.50%. Ahead of that we will see the China trade date readings for January. A fairly quiet Friday will witness the opening ceremony of the 2018 Winter Olympics in Pyeongchang; it could be interesting to see how North Korea fares this year. Aside from that, China’s inflation numbers and UK IP print could garner some market attention.

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