A mixed week across asset classes caused by the surge of Covid-19 cases and subsequent restrictions, coupled with whipsawing US fiscal rhetoric saw the yield on the UST 10-year fall 3bps to 0.75%. The dollar (DXY Index) rose 0.67% and Brent crude was up 0.19% over the week. Following Putin and Saudi’s Bin Salman’s recent extensive talks we look to today’s OPEC+ compliance/cooperation talks and outlook. Markets appear to be enjoying a risk-on tone so far this morning following reports that US aid package negotiations are back on the table coupled with robust China’s economic data prints.
According to reports Pelosi has called for a Tuesday deadline for US fiscal talks. However, with the stark difference between the Democrat’s proposed USD 2.2bn package and the Senate’s reported USD 500bn ceiling, concerns over a suitable agreement still remain. Lawmakers could always take a look at Trump’s USD 1.8tn aid proposal, but with the US sitting on its highest fiscal deficit on record, at USD 3.2tn (as at end September), or 16% of Q2’16 GDP, we are not sure either side will settle anywhere close! On the data front, US retail sales readings surpassed market expectations in September, although the readings were not overly exciting, given the current environment a 1.9% mom advance witnessed a pick-up in market sentiment. The Fed’s favoured retail sales control group reading smashed expectations of +0.3%, at +1.4%. The Empire Manufacturing reading for October. however, disappointed at a subdued 10.5, from 17 in September and missed expectations for a reading of 14.
China’s GDP figures released this morning showed Q3’20 growth came in at 4.9% you, up from 3.2% (although missed expectations for +5.5% growth). Industrial production and retail sales surprised to the upside in September, at 6.9% and 3.3% yoy, respectively. Both supply and demand side data indicate sustained momentum, as we enter the final quarter of the year. As such, the renminbi has continued its recent strengthening. Although we expect some volatility in the lead up to the US elections, the offshore renminbi’s 6.06% total return against the dollar has supported the ~14% gain on our Renminbi Bond Fund, USD A class. Interestingly, China removed its reserve requirement ratio (RRR) last week, the last time the PBoC reduced the RRR to 0% was following a rapid appreciation of the renminbi in 2017.
Closer to home, Moody’s moved to downgrade the UK’s long-term currency rating by one notch to Aa3 (stable), bringing it in-line with Belgium and the Czech Republic. The UK is rated AA by S&P and AA- by Fitch. Moody’s noted the UK’s economy is “meaningfully weaker than expected and is likely to remain so in the future.” The rating agency also highlighted its concerns over “the weakening in the UKʼs institutions and governance”. Adding, “Despite the projected recovery, we estimate a sharper peak-to-trough contraction for the UK than for any other G-20 economy.” Following the stalled talks last week, any further Brexit development this week will therefore be followed very closely by markets, particularly today as the EU negotiators’ visit to London was called off by No. 10. We heard this morning that the House of Lords is reportedly due to begin its review of the Brexit Bill today, and look to tame it, in an attempt to revive Brexit talks.
Over the weekend Fed Presidents Rosengren (Boston) and Kashkari (Minneapolis) highlighted their concerns over asset bubbles, calling for tougher regulation to prevent Fed intervention; particularly in this low interest rate environment. Any further Fed comments on the matter will therefore be followed closely this week. Over the weekend we also heard that, effective December 1, China will introduce a new law restricting sensitive exports, in a move to protect national security. This announcement comes amid the intensifying US-China tech war, so any developments will therefore be monitored very closely. Elsewhere, the ECB’s Lagarde will today kick-off the central bank’s “Conference on Monetary Policy: bridging science and practice.” Meanwhile BoE Governor Broadbent will discuss the production of cash before the Parliament’s Public Accounts Committee. On Tuesday the NY Fed will host a conference on culture, meanwhile, Chicago Fed President Evans will discuss Covid-19 and the future of the economy at a Detroit Economic Club online event. Datawise we have the US housing starts and building permits readings which are expected to have picked-up in September, off the back of sustained low mortgage rates. Interestingly the US housing market has seen a number of readings reach or beat pre-pandemic levels. The same can be said about the UK housing market, according to the Rightmove numbers released this morning, the house prices rose a further 1.1% in October, that is 5.5% yoy. A fairly quiet day on Wednesday could see Tesla’s Q3’20 earnings excite many. We also have Cleveland Fed President Mester and NY Fed EVP Singh discussing speaking at different events. Meanwhile BoE Deputy Ramsden will speak at a Society of Professional Economists event on post-Covid policy challenges. Aside from the Fed’s Beige Book and the UK’s CPI reading there is not much key data due. Thursday’s US presidential debate, the last before the elections, will make for interesting viewing. Ahead of that we will hear from Dallas Fed President Kaplan on Global Perspectives and BOE Governor Bailey speaks on finance and climate change. US jobless claims are due on Thursday. A quiet Friday will see US Markit PMI readings, UK Markit PMI and UK retail sales readings.