The Weekly Update

The big news last week was Trump’s withdrawal from the Iran Nuclear Deal; after which he stated that any nations found promoting Iran’s nuclear capabilities will also be sanctioned. Oil endured a bumpy ride as a result through the week, with Brent eventually closing ~3% higher. Higher oil prices fuelled further inflation concerns, which saw UST yields drive back above 3%, however, broadly weaker CPI data prints saw the curve come off recent high yields; with the 10-year eventually closing the week relatively flat, at 2.97%.

The long-end of the Treasury market also regained some composure after a successful record long bond auction of $17bn with a 2.38x coverage even though the issue came at 0.7bps through the 1pm when issued bid with a 71% buy-side takedown, better than the recent averages. This led to the 5- to 30-year Treasury curve flattening to the lowest spread since August 2007, and the 2- to 10-year spread also narrowing in a bull flattening move. Assisted by a weaker CPI inflation report it does look like the curve could continue to flatten further and eventually invert. To that point, the Fed’s Bullard noted: that “the yield curve inversion is getting close to crunch time” adding it “would be a bearish signal for the US economy if that happens”. He also commented that “we’re not in any danger of any breakout in inflation at any time over the forecast horizon… I basically have no problem with some overshooting of the target”. Regarding rates, Bullard said, “it’s not necessary to change the policy rate to keep inflation at target”.

Elsewhere, China's April data points came in pretty much in line with expectations. The renminbi gained 0.36% against the dollar. Ongoing Sino-US trade talks will be watched closely again this week. Also of interest was the release of three US detainees held in North Korea last week, and that the nation is looking to dismantle its nuclear test sites ahead of the Trump-Jong-Un June, 12 meeting in Singapore. Also in Asia, Mahathir Mohamad has been sworn in as Malaysia's new prime minister at the ripe age of 92, after a shock victory in the country's election, ending six decades of control by the ruling coalition; the country’s hopes for change have been revived.

Closer to home, the BoE keeping rates at 0.5% came as a surprise to some, especially as markets were pricing the chance of a hike at the meeting on Thursday at a near certainty on the 19th April, only to fall to below a 50% probability following softer data, including CPI and growth data prints. Currently, a 25bps hike is priced in at over 50% for the November meeting.

We expect a quiet day today with little in the way of key data. Tuesday’s Empire manufacturing and US and China retail sales and China’s activity data releases for April will be of interest. Wednesday sees US housing starts and building permits and activity readings. Import and export price indexes and sentiment readings for April will be released on Thursday, with a relatively data-free day on Friday. Brexit chat and Fed speakers and nominee confirmation hearings will also be monitored by markets.

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