With less than six weeks to go before 2018 comes to an end, two key themes that have been driving the global markets all year have yet to have their encore. First, a focus will be on any progress regarding trade negotiations between China and the U.S. at the G20 Summit, which kicks off next Monday. President Trump gave the markets hope late last week by suggesting the U.S. may not impose more tariffs on Chinese goods in response to a letter received from Chinese officials addressing outstanding trade issues. The Trump Administration previously announced plans to increase tariffs from the current 10% to 25% on $200 billion of Chinese goods effective January 1st.
After the G20 Summit, all eyes will be on the Federal Reserve meeting on December 18-19th. As the market largely expects another 25bps rate hike, close attention will be paid to any changes in the committee’s economic projections and language from Fed Chairman Powell’s post-meeting press conference. While Powell has been bullish on the current U.S. economic conditions, he noted risks to growth last week (see more below).
Risks to global growth were pronounced last week on the back of disappointing third-quarter GDP data for Japan and Germany. Further, signs of an economic slowdown in China were illustrated through weak retail sales and credit growth data. Given the potential slowdown abroad coupled with geopolitical risks looming (i.e. Brexit, trade tensions, the Italian budget), the market appeared to have a more “RISK-OFF” mentality last week, with Treasury yields falling across the curve. The 10-year benchmark closed the week at 3.07%, about nine basis points lower than where it started. Rates are now nearly unchanged from the beginning of October. A slew of data is on the calendar this week both domestically and abroad (see more below).
I. U.S. Economic Data/Markets
- October Retail Sales surprised to the upside increasing 0.8% (versus estimates of 0.5%). Automotive and material purchases largely drove the data.
- September data was revised lower, falling 0.1% as opposed to increasing by 0.1%.
- Federal Reserve
- Chairman Jerome Powell noted headwinds to recent economic growth, including a softness in the housing sector, high levels of corporate debt, slowing economic growth abroad and benefits from recent fiscal measures waning.
- Factors weighing on the housing sector, per Powell, included: higher material costs, labor scarcity, and higher mortgage rates.
- The Fed will conduct a review next year regarding the way it presents information to the market and how it may be more transparent and accountable. Discussions across the country will be held with various stakeholders.
- The review may also result with the Fed targeting a range for inflation as opposed to its current target of 2%, or aiming for specified nominal GDP level in lieu of inflation or a combination of both.
- Chairman Jerome Powell noted headwinds to recent economic growth, including a softness in the housing sector, high levels of corporate debt, slowing economic growth abroad and benefits from recent fiscal measures waning.
- U.S. Manufacturing increased in October, for the fifth straight month, rising 0.3%.
- Manufacturing accounts for about 12% of the economy.
II. Trade
- Chinese/U.S. Trade
- China apparently sent a written response to the U.S. regarding trade demands. The letter addressed 142 items the Chinese were working on, areas where they refused to yield on any items they were willing to negotiate with the U.S. While President Trump noted that the U.S. may not impose further tariffs given China’s willingness to come to an agreement, he felt that certain items were left off the list in the letter. President Xi and Trump are scheduled to speak at the G20 Summit next week.
- Brexit
- Prime Minister Theresa May’s cabinet approved her Brexit proposal. The U.K.’s exit from the EU is scheduled for March 2019.
- While May intends to present the proposal to the EU later this month, she still needs to garner approval from the U.K. parliament, where her party has a minority in the lower house.
- Further, turmoil within May’s own Conservative Party continued. A day after the cabinet approval, six U.K. government officials resigned, including Dominic Raab, Brexit secretary, all adding to the growing political turmoil and uncertainty surrounding May’s lasting leadership. A motion of no-confidence in May’s leadership is speculated this week.
- The British pound fell nearly two percent, its biggest one day decline since July 2016, on the back of the resignations. GBPUSD is currently trading at 1.28455.
- Prime Minister Theresa May’s cabinet approved her Brexit proposal. The U.K.’s exit from the EU is scheduled for March 2019.
III. Other
- Italian budget – despite warnings from the EU commission and a deadline to revise its budget, the Italian government noted it intends to keep a deficit target of 2.4% and a growth forecast of 1.5%.
- It remains to be seen if the EU Commission will take disciplinary actions against Italy, a decision is expected later this week.
- Ten-year Italian bonds took a hit on the back of the news, with yields rising to three-week highs. Similarly, Italian stocks were among the worst performers in Europe.
- The Euro also felt downward pressure given the announcement.
- Chinese economic data
- Retail sales drop to a five-month low rising 8.6% y-o-y compared to expectations of 9.2%.
- October credit growth weakened with new yuan-based loans at $97.3 billion compared to $198.4 billion in September. A softening housing sector coupled with weakening demand point to a deceleration of the economy. Last month, China’s third-quarter GDP slowed to 6.5% y-o-y, the slowest growth since 2009.
- Japan’s GDP last quarter surprised to the downside at -1.2% annualized versus expectations of -1%. The contraction in growth reinforces the Bank of Japan’s accommodative policy.
- Germany’s GDP also shrank last quarter by 0.2% q-o-q, the first time the economy has contracted since 2015. Weak private consumption and strong imports contributed to the poor results.
- European Central Bank President Draghi noted resilience in the Eurozone economy he also mentioned uncertainties surrounding growth and inflation in the region, suggesting that inflation may slow down in the coming quarters, in a speech last week. A slowdown in inflation may deter the central bank’s plans to raise rates later next year.
- Tightening liquidity conditions could impact the bank’s path in raising rates.
- Federal Home Loan Bank issued its first SOFR-linked (LIBOR’s preferred replacement index) bond issuance.
- The $4 billion deal was split between two tranches with $1.5 billion maturing in six months and $2.5 billion in twelve months.
SIFMA has recommended a full market close for Thursday, November 22 in observance of Thanksgiving. SIFMA has also recommended an official early close for Friday, November 23 at 2:00 pm. Separately, although SIFMA has not officially recommended an early close for Wednesday, November 21, we expect liquidity to be relatively light.
Please find the 2018 SIFMA holiday schedule here: https://www.sifma.org/resources/general/holiday-schedule/
For all those celebrating the holiday, Happy Thanksgiving!
Key data/events this week:
- Bank of Japan Gov. Kuroda speaks (Monday)
- EU Financial Stability Review
- FOMC Official Williams speaks
- EUR EcoFin Meeting (Tuesday)
- BoJ Monetary Policy Statement
- U.S. Housing Starts
- U.S. Building Permits
- Bank of Canada Official Wilkins speaks
- EU Commission decision on Italy (Wednesday)
- JPY All Activity Index
- GBP public sector net borrowing
- U.S. Durable Goods
- U.S. Existing Home Sales
- JPY CPI
- JPY foreign bond and stock investments
- GBP Inflation Report Hearings (Thursday)
- Swiss CPI
- ECB Monetary Policy Meeting Accounts
- EUR/German Markit PMI (Friday)
- CAD Retail Sales
- CAD CPI
- U.S. Markit PMI