The main highlight last week was the well publicised and priced in 25bps rate hike, to 1.50-1.75%. The message for this year's outlook was fairly dovish, with still only three hikes priced in. As it was Jerome Powell’s first meeting as Fed Chair he did little to stir markets, reiterating a gradual and flexible approach to normalising rates, adding that there is little upside risk to inflation currently. The dollar took a tumble and US Treasuries rallied following the statement. Elsewhere, in response to the rate hike, the People’s Bank of China increased its money market rate by 5bps saying the move is “in line with market expectations and a normal reaction to the Fed’s rate hike”. The offshore renminbi gained 0.21% while the Japanese yen continued its appreciation gaining 1.21% against the greenback last week. Oil also closed 6.4% higher over the week, closing above $70pb (the highest level since mid-2015) following the appointment of John Bolton as US national security advisor; markets expect sanction tensions with Iran to be resurrected.
With the excitement of the US hike over, focus will shift to the developing global trade policies; last week Mr Trump announced USD 50bn tariffs on Chinese imports, with China unveiling USD 3bn tariffs on US products including steel pipes and wine, in retaliation. Other products could be added to the list including soybean imports, which could impact ~300,000 US soy farmers. We will continue to monitor the situation as it develops as talks between the world’s two largest economies continue, however, at this stage do not see any unnecessary downward pressure on the renminbi or China’s short-medium economic growth outlook.
The week ended with a risk-off tone; equity markets sold-off and the VIX (volatility Index) spiked higher. Interestingly, every sector in the S&P Index closed lower over the week; the index is also in the red year-to-date. Meanwhile, the DXY (dollar) Index fell below 90; trade tensions point to a weaker greenback. The yield on the 10-year UST benefited from weaker sentiment; it will be interesting to see how well the market absorbs the USD 294bn UST issuance this week.
Closer to home the BoE stated that “all members agreed that any future increases in bank rate were likely to be at a gradual pace and to a limited extent”, Bloomberg is pricing in a ~70% chance of a hike at the next meeting in May. The pound benefited from the upbeat tone. Elsewhere, Spain received a one notch upgrade from S&P, to A-, on continued strong economic performance; as the country’s NFA ranking remains below our investable 3 star cut-off we would not look to hold its bonds. Also, Spanish bonds broadly trade expensively.
This holiday shortened week is expected to be relatively quiet, although there are a number of Fed Speakers, starting with Cleveland's Mester, who will discuss monetary policy at Princeton University later today. The key data points this week will be the US PCE readings on Thursday, and European inflation numbers. As we mentioned Trump-tariffs will also be watched closely in the coming weeks. As usual Brexit discussions will continue; later today both sides will meet to discuss the Irish border. In terms of data, we’ll get the Chicago Fed National Activity Index reading later today, followed by a series of sentiment readings in the US and Europe on Tuesday. The third reading for Q4’17 US GDP may be of interest on Wednesday, with the main focus shifting to the aforementioned US PCE report on Thursday, and the personal income and spending prints.