The Weekly Update

Away from the ‘Beast of the East’, global politics and Mr Trump's steel and aluminium tariff announcement, new Fed Chair Jerome Powell’s testimonies and US PCE were the main features last week. Powell stated that the central bank believes the US economy is not overheating adding that wages do not appear to be causing any concerning upside risks yet. He reiterated that a gradual approach to rate hikes is still on the books, and the Fed will continue to manage the balance between targeted inflation and economic stability. Powell also highlighted the importance of the core PCE reading (as opposed to core CPI), as a “better indicator of future inflation”; the core PCE reading for January came in at 1.5% yoy so still well below the Fed’s 2% target. Other data out of the US was mixed, with the likes of new home sales, and durable and capital goods readings disappointing, while ISM prints bounced higher. Over the week, the yield on the 10-year UST was unchanged at 2.87% and the dollar was marginally higher. Meanwhile, the Japanese yen gained over 1% and the offshore renminbi was marginally lower against the dollar.

This morning at the opening of the China’s National People’s Congress (NPC), China’s Premier Li Keqiang’s noted 2018 growth target is set at ‘around 6.5 percent’, as expected, however, more importantly, the government has lowered its budget deficit for the first time since 2012, to 2.6% of GDP (from 3%) as the push to manage debt levels and curb financial risk continues. The expansion of air and naval defence were also highlighted as key priorities; with defence spending expected to increase by over 8% this year. In terms of Mr. Trump’s steel and aluminium tariff announcement, and further comment that “trade wars are good, and easy to win”, Li did not appear to respond directly per se, however, he did mention that China would protect its interests and would look to open up its markets and reduce caps on foreign investment. China’s Foreign Minister Zhang Yesui did, however, say “China does not want to fight a trade war with the US, but we absolutely will not sit by and watch as China’s interests are damaged”.

This week politics could dominate market focus as the outcome of the Italian elections are confirmed.  Meanwhile, in Germany, Merkel has secured her fourth term in power as the SPD finally voted in favour to form a coalition. Elsewhere, further highlights at the two week NPC will include: Xi’s constitutional amendment, year ahead budget approval, details on a cleaner greener and more prosperous society (by 2020), and further details on fiscal and monetary policy, including a potential property tax. The ECB meeting on Thursday will be of interest as will the BoJ meeting, which may be overshadowed by the US employment data dump. On this, estimates are currently for a fall in employment to 4%, and for average hourly earnings to come in at 2.8% for February (marginally lower than in January).

Away from politics, today sees a number of PMI readings from across the globe. Tuesday could be relatively quiet with oil talks, and US factory orders and durable goods readings the main focus. Markets will turn to Q4’17 EU growth on Wednesday, and in the US we will get the ADP employment reading, trade balance and the Fed’s Beige Book. As mentioned, the ECB meeting on Thursday will draw attention, as will Draghi’s following press conference. China trade data will be watched closely on Thursday as will the PPI and CPI data prints on Friday. The highlight on Friday, away from the trade data and IP reports from the EU and UK, will be the aforementioned US employment numbers for February. As always there will be further headlines following Brexit developments.

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