The Weekly Update

Broadly weaker data globally saw the markets err on the side of caution last week. World PMI and ISM figures sent shockwaves across markets last week; the US ISM manufacturing reading fell to a decade low (further into contraction territory), while the non-manufacturing print markedly missed market expectations falling to a three-year low. Following the latter reading, US Treasury yields rallied and currency markets witnessed knee-jerk dollar selling. Clearly Trump’s trade war is also having a negative effect on the US economic growth outlook. The 10-year benchmark eventually closed the week 15bps lower, at 1.53%, and the dollar fell 0.3%, measured by the DXY Index. Oil prices also plummeted on the assumption that global demand is expected to fall; Brent closed the week at $58.37pb, 5.72% lower.

All eyes turned to Friday’s mixed US employment prints, unemployment fell to 3.5% while non-farm payroll missed expectations (but was revised higher for previous two months). The key figure however missed expectations, with average hourly earnings falling to 2.9% in September, from 3.2% previously. Fed comments last week backed up the market sentiment with the likes of Kaplan saying the two recent rate cuts have helped “reduce the likelihood of a very severe slowdown but doesn’t eliminate it” adding that he would prefer to cut “sooner rather than later.'' Meanwhile, in an attempt to manage market expectations, Fed Chair Powell opined: “While not everyone fully shares economic opportunities and the economy faces some risks, overall it is— as I like to say — in a good place,”, however, noted “the U.S. economy, like other advanced economies around the world, is facing some longer-term challenges,”. Markets will no doubt closely follow Powell’s speech at the NABE annual conference which concludes on Tuesday. The current implied probability of a rate hike at the FOMC meeting at the end of October stood at ~73%; a drastic move from the ~43% priced a week earlier.

Across the pond, euro area economic figures disappointed; particularly inflation readings. Meanwhile, Brexit negotiations appear to be headed in no direction following PM Johnson’s proposal; which the EU have said must be revised and resubmitted this week. Over the weekend, Johnson said he is willing to pack his bags and leave the EU, deal or no-deal come October 31, adding that he will seek a Supreme Court ruling for a no-deal Brexit if nothing else is negotiated before Halloween. This comment will no doubt keep market makers on the edge of their seats this week.

With China closed for Golden Week, there was not much to report, however, any trade rhetoric will be monitored very closely following comments that China is becoming less tolerant and are thus tapering scope for negotiation with the US, particularly around China’s industrial production and government subsidies. Planned talks on October 10 will, therefore, be key to market sentiment this week, especially ahead of the upcoming US trade tariffs on Chinese imports. The offshore renminbi gained 0.36% against the dollar (spot basis) last week. Staying with Asia, over the weekend, the US-North Korea meeting in Stockholm was a non-starter, with Kim Jong Un hinting that he will ramp up nuclear threats if the US doesn’t ease its sanctions by year-end. North Korea’s chief negotiator Kim Myong Gil was quoted saying: “If the U.S. is not well prepared, who knows what terrible incident could happen. Let’s wait and see.”

Looking ahead, we heard that the US will continue its overnight repo activity this week, with reports suggesting this could continue into November. Following Germany’s disappointing factory orders prints earlier this morning, the industrial production reading on Wednesday will be watched closely. September US PPI and CPI prints are due on Tuesday and Wednesday, and are expected to come in marginally unchanged from August levels. The only other data reading of interest will be China’s Caixin PMI also on Wednesday. Fed and BoE rhetoric will attract market attention on Tuesday as will the FOMC minutes on Wednesday. A relatively quiet end to the week will see Indian PM Modi and China’s Jinping meet at an unofficial summit on Friday and the conclusion to the Nobel Prize Awards.

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