A week of two halves saw the UST yield curve initially flatten, with the 2s30s spread tighten to 2007 pre-GFC levels, only to steepen marginally towards the end of the week following renewed inflation concerns off the back of a crude oil rally, and in anticipation of bumper UST issuance this coming week. Several newswires commented on the inverted yield curve concerns, thus recession fears; we do not foresee a US recession on the immediate horizon, however, have not discounted the possibility in the medium- to long-term. As we have pointed out previously, historically, the UST curve has tended to flatten during tightening cycles, hence our bias towards high-quality, sovereign and quasi-sovereign, hard-currency bonds at the longer end.
Asset classes were broadly mixed, with trade spat news adding to market noise towards the end of the week. Equity markets moved higher, with the S&P Index back in the black, just, year-to-date. As mentioned, oil bounced higher, with Brent closing the week above $74pb. Incidentally OPEC talks on Friday saw Saudi and Russia agree to maintain production curbs (with Saudi’s $80pb target in mind); Trump subsequently tweeting that the cartel is artificially pushing crude prices higher. Meanwhile, the yield on the 10-year UST swung higher, closing at 2.96%.
Fed rhetoric remained mixed to slightly dovish; inverted yield curves, below target inflation, tariff headwinds and growth tailwinds were the flavour of the week. The central bank’s Bullard said he “is getting concerned over the flattening yield curve”, adding “we could have an inverted yield curve within six months… I do want to flag the yield curve issue because it is time to have that debate right now.” Other members including Kaplan and Dudley appeared more dovish in their rate expectations, stating a flatter trajectory for rate hikes. The former official referred to growth as a tailwind, rather than a headwind, while Dudley highlighted continued subdued inflation, despite a strong labour sector, makes the case for aggressive tightening “less compelling.” Just on the growth comment, the Fed’s Beige Book noted a positive outlook, however, highlighted newly imposed and proposed tariffs as a possible drag on current “modest to moderate” growth.
China March activity data surprised to the upside and growth was in-line with market expectations at 6.8% yoy. Domestic growth was a key driver of expansion in the first quarter this year suggesting the economic model transformation is underway, and the economy less reliant on external growth; positive news in the face of trade tensions. Also of interest was the PBoC’s 100bps RRR chop for certain banks, effective April, 25. We do not see this as a change to the current prudent and neutral policy stance, rather an opening up of interbank liquidity and part of China’s continued drive of interest rate marketisation reforms; as highlighted by the central bank’s Governor Yi Gang at the Boao Forum.
An action-packed week ahead will witness a historic Korea summit, ECB and BoJ policy meetings, the initial reading of US Q1’18 GDP and global PMI prints. Today US and Eurozone PMIs and the Chicago Fed National Activity Index will be watched closely. Mr Macron’s three-day visit to the US, commencing today, may also garner some attention. Tuesday will see German IFO, US consumer confidence and new home sales releases. The EU and UN start discussions on Syria. Leaders of the Association of Southeast Asian Nations gather at a summit on Wednesday; expected to end on April, 28. Stock markets will be watching Facebook and Twitter earnings later in the day. Amazon earnings follow on Thursday, where we will also get the US durable goods, trade and jobless claim releases. Friday is set to be a busy day in terms of data and events. The day kicks off with the BoJ policy meeting and North and South Korea are set to meet at a summit in the demilitarised zone. In terms of data, we will get the China IP, Japan IP, unemployment and retail sales prints. However, market attention will shift to the Q1’18 US GDP reading; where current estimates are for +2% growth in the first quarter (from 2.9% previously). Trade chatter is expected to continue this week; US Treasury Secretary Mnuchin last week said he’s "cautiously optimistic" on reaching a trade agreement with China, adding a trip to the nation is being considered.