The Federal Reserve’s target of 2% was met yet again for the month of July, U.S. consumer consumption is on the rise and the labor market remains tight, all paving the way for the Fed to hike interest rates at its meeting later this month. Equity indices continued to remain robust, with the S&P 500 and Nasdaq Composite (which broke above 8,000 for the first time) closing at all-time highs earlier last week. Oil prices edged higher, WTI futures are trading at 71.145, on the back of looming Iran sanctions. Ten-year Treasury yields ended the week around 2.86%.
This week, the market and the Fed will play close attention to the U.S. August jobs data, with a specific focus on wage growth, all to be released on Friday.
Globally, the attention remains on trade talks. Mexico and U.S. came to an agreement last week, while Canada and the U.S. closed the week at a standstill and are expected to resume talks this week (see below). Given the escalating trade tariffs, market practitioners will also focus on trade data to be released from China and the U.S. in the coming days. Further, more levies are soon expected to be imposed on Chinese goods. The markets’ appetite for emerging market exposure will likely remain weak on the back of trade tensions, continued pressure on Chinese growth and the economic crises in both Argentina and Turkey.
I. U.S. Economic Data/Markets
- Core personalized consumption expenditures, the Fed’s preferred measure of inflation, increased to 2% y-o-y in June. The core PCE hit the Fed’s target of 2% for the first time this year in March.
- Q2 GDP increased 4.2% on an annualized basis in the second quarter, surprising on the upside (expectations were closer to 4%). The expansion was the fastest rate since 3Q 2014.
- Despite the strong data, some economists believe there will be a slowdown next quarter pointing to the goods trade deficit in July edging higher and a weakening housing market.
- U.S. spending increased in July by 0.4%. Consumer spending comprises about two-thirds of U.S. GDP.
- Weekly jobless claims surprised on the upside at 213k versus market expectations of 214k.
II. Trade Talk
- Mexico and the U.S. came to an agreement on key points of revamping NAFTA, which paved the way for U.S./Canadian negotiations. Mexico/U.S. negotiations included:
- A push to increase the percentage of a car (to 75% from 62.5%) that must be sourced from a NAFTA nation to move freely across the borders of the three NAFTA nations.
- An increased threshold for the amount of manufacturing that must be performed by auto workers making $16 an hour or more.
- Canada and the U.S. were at a standstill regarding their negotiations by the end of the week, but are expected to resume talks on Wednesday.
- A deadlock over prices for dairy products and patent protections over medicines were among the discussion points.
- The Euro was hit late last week on the back of Trump commenting that the EU’s proposal to eliminate auto tariffs will not suffice. The Stoxx Europe 600 Index, led by automakers also declined on the back of the comments.
- Another $200 billion of levies is expected to be placed on Chinese goods by the Trump Administration this week.
- The public has until Thursday to submit comments regarding the proposed tariffs which will impact products such as semiconductors and selfie sticks.
- Chinese stocks continued to get battered on the back of trade concerns, tightening monetary policy and slower economic growth.
- China threatened to retaliate with potentially imposing tariffs on about $60 billion of U.S. goods.
- Brexit negotiator for the EU, Michel Barnier, spurred a rally in GBP when he mentioned that the EU will likely offer to maintain close relations with Britain after it leaves. Sterling moved above $1.30 for the first time in three weeks.
- Later in September, the Conservative Party will hold its conference, where British PM Theresa May may face a leadership challenge.
- The market will also pay close attention to UK manufacturing and services data to be released this week.
III. Other
- Secured Overnight Funding Rate “SOFR” (LIBOR’s replacement) increasingly accepted by the market.
- MetLife issued a $1 billion two-year floating bond tied to SOFR. This is the first time a benchmark issuance was based on SOFR from an entity that was not a top-rated sovereign, supranational or agency issuer.
- In the past two months, the market has seen various SOFR-linked debt instruments. Such issuers included: Fannie Mae, Credit Suisse, Barclays and the World Bank.
- The Barclays transaction was unique in that it was the first Wall Street bank to issue asset-backed commercial paper tied to SOFR. Investor appetite surprised to the upside, although most money market investors like the idea of an instrument based off of a daily rate, particularly in a rising rate environment.
- The World Bank deal, a $1 billion 2-year floating rate bond was worth noting in that it was swapped from overnight SOFR back to LIBOR.
Emerging Markets
- Argentina’s central bank unanimously voted to raise its benchmark rate to 60 percent from 45 percent last Thursday, to restore confidence in its currency. The 15 basis point rate hike spurred a ten percent depreciation of the peso. The country has been battling increased inflation, debt levels, and trade deficits.
- The central bank’s move comes a day after President Macri asked the IMF for a quicker bailout. The country asked for a $50 billion loan.
- The Turkish lira also took a hit as investors get increasingly jittery on the economic stability of emerging markets. Turkey also faces sanctions given political strife with the U.S. The lira depreciated about 40 percent against the USD this year.
- The contagion effects of both the peso and lira have been seen across emerging markets. Both the Indian rupee’s and South African rand’s declines have further been exacerbated by general EM worries. Further, higher interest rates and a stronger USD continue to pressure the dollar-denominated debts borne by both countries.
- Italian economic data, in particular, Markit’s August services PMI released this week will be keenly watched. Given concerns regarding Italy’s budget and current deficit, and thereby the recent widening of its government bond yields, the aforementioned data will be reflective of whether such concerns have trickled into business sentiment.
This week:
The U.S. and Canadian markets were closed on Monday due to the Labor Day holiday. Given continuing trade rhetoric, the market will pay close attention to key global trade and services data scheduled to be released throughout the week. Two major central banks (Reserve Bank of Australia and Bank of Canada) will announce their rate decisions as well. The Reserve Bank of Australia will likely remain on hold, due to spare employment capacity and lukewarm inflation.
We believe the Bank of Canada will also pause this week, despite stronger-than-expected GDP and higher inflation, as the BoC’s Gov. Poloz is focused on a gradual path of rate increases. Given the bank’s hike in July, we suspect a potential hike in October depending on the data. Finally, a number of key economic releases are scheduled this week including August unemployment data for both the U.S. and Canada.
Key data/events include:
- GBP/Italian Markit Manufacturing PMI (Monday)
- AUD rate decision (Tuesday)
- GBP inflation report hearings (Tuesday)
- CAD Markit Manufacturing PMI (Tuesday)
- U.S. ISM data (Tuesday)
- AUD Q2 GDP (Wednesday)
- GBP/Italian Markit Services PMI (Wednesday)
- U.S. Trade Balance (Wednesday)
- CAD BoC Rate decision (Wednesday)
- U.S. Markit PMI composite/services (Thursday)
- German trade data (Friday)
- EUR GDP (Friday)
- CAD unemployment data (Friday)
- U.S. unemployment data (Friday)
- CNY August trade data (Saturday)
U.S. Economic Data includes: ISM Manufacturing PMI (Tuesday), ISM Prices Paid, construction spending, total vehicle sales, trade balance (Wednesday), Redbook index, ISM NY index, ADP employment (Thursday), nonfarm productivity, weekly jobless claims, unit labor costs, Markit services PMI, Markit PMI Composite, ISM Non-Manufacturing PMI, factory orders, August unemployment data (Friday).
Overseas Economic Data includes: July AUD retail sales (Monday), CNY Caixin Manufacturing PMI, Swiss retail sales, EUR/German/UK Markit Manufacturing PMI, GBP retail sales, AUD rate decision (Tuesday), Swiss CPI, GBP PMI construction, GBP inflation report hearings, CAD Markit Manufacturing PMI, AUD Q2 GDP (Wednesday), CNY Caixin Services PMI, Spain/German/EUR/GBP Markit Services PMI, July CAD trade data, CAD BoC rate decision, JPY foreign bond/stock investments, AUD trade data (Thursday), Swiss GDP, JPY overall household spending, AUD home loans (Friday), JPY leading economic index, Swiss unemployment rate, German industrial production, German trade data, EUR GDP, CAD unemployment data, CNY August trade data.
