A mixed week across asset classes saw the yield on the 10-year close 4bps lower at 2.86%, and the UST curve flatten; the 2s30s spread narrowed further, partly due to a better-than-expected 30-year auction. Meanwhile, global stock markets suffered a sell-off, the dollar was relatively flat, while Brent bounced over 5% to almost $80pb. In terms of key data, the third reading for Q1’18 US GDP disappointed at 2% (from 2.2%) while the US PCE report surprised to the upside at 2%yoy in May. China’s official PMI readings over the weekend remained strong, with the services reading beating expectations.
Meanwhile, “Protectionism” and “Trade-Wars” were some of the most commonly used phrases across newswires, with little sign of concerns abating anytime soon as Mr Trump marches ahead with his aggressive trade and investment policies. Just what he will achieve is completely unknown, but what we do know is that trade wars and protectionism are never a good thing for any nation, and are the greatest threat to global growth. Bond investors can thank ongoing concern over US tariffs and the sharp drop in Atlanta Fed’s GDPNow projections for the quarter and an increasing number of market participants calling 2018 tops for both stocks and Treasury yields.
Aside from trade rhetoric, reporters were seemingly obsessed with the weakening of the renminbi; with some claiming China is using the currency as a tool to counter potential trade effects. We see little indication that this is the case. Yes, the offshore renminbi has weakened recently due to a broadly stronger dollar and short-term market sentiment (although still remains amongst the better-performing currencies against the greenback so far this year). However, it seems to us rather counterintuitive to weaken a currency in the face of a US president who is desperate to name China a currency manipulator, and in a nation pushing for domestic-led consumption. Instead, we see the PBoC as allowing market forces a larger say in the exchange rate with little intervention (aside from managing volatility); evidenced by the fact that the country’s fx reserves have in fact remained stable, above USD3.1tn this year. The PBoC’s Q2’18 policy statement stated that it will maintain liquidity at “reasonable and ample” levels; which should help to stabilise the currency against a fragile global backdrop.
Elsewhere, Mexicans headed to the much-awaited polls on Sunday, where left-wing Lopez Obrador won in a landslide victory; market reaction will be closely watched as the week progresses. As we enter the second half of the year, global markets will be closely watching the potential escalating Sino-US trade tensions as the US is due to impose USD34bn worth of tariffs on China on July 6th. The Fed minutes release on Thursday will also be of interest following the more hawkish meeting in June. The week will end with the all-important US employment report on Friday; with all eyes on average hourly earnings, currently expected at 0.3% mom and 2.8% yoy.
In terms of other key data, this morning kicked-off with the broadly in-line Caixin China manufacturing PMI. Later today we have the US ISM release, flash manufacturing PMI readings for Spain, Italy and the UK and eurozone unemployment print for May. Tuesday sees the May US factory orders and durable goods orders, which will be interesting after the disappointing April readings. A quiet day for US data on Wednesday as the nation celebrates Independence Day. Thursday’s US ADP employment reading, non-manufacturing ISM and German factory orders may garner some interest. Aside from the US employment report, the nation’s trade balance may be of interest on Friday.