With the Pacific G10 Macro Rates Team
Global Macro Overview
Geopolitics has been driving the financial markets for another week. However, unlike the previous 12 months, news has mostly been positive. The level of pessimism with regards to BrExit and US-China trade war became apparent when FX and Rates markets reacted aggressively to positive news on both. GBP had its best two-days in over a decade and US 10y bond yields sold off 25bps in three days. Interest rates are pricing around one cut from the Fed in 2019 and less than one cut from the BoE by the end of 2020.
US: It has been a relatively quiet week on a data front: inflation metrics CPI and PPI came in weaker and slightly under expectations; jobless claims are still at cycle lows; consumer expectations have improved much stronger than expected.
Fed Chair Powell pre-announced upcoming technical balance sheet expansion that was designed to address the stability of money markets. The Fed will be buying $60bn Tbills per month at least until Q2 2020. This is slightly more aggressive than many observers had expected, so the Fed is trying to keep tight control over the short-end of the curve.
Canada: Strong housing data was followed by a surprisingly strong employment report on Friday. The economy added 70k full-time jobs and hourly wages increased 4.3% YoY.
Data has continued to be weak in Europe: factory orders in Germany, retail sales in Italy, manufacturing and industrial production in France all weakened. On the upside, industrial production in Italy, Spain and Germany showed signs of recovery.
The ECB released minutes from the last GC meeting that were met with even more controversy, as the FT reported that Draghi ignored advice from internal technocrats against re-starting QE. The fact that advice was ignored does not constitute anything surprising, but these internal disputes are rarely leaked to the public, indicating more push-back against QE within the ECB.
Scandinavia: In Sweden production and inflation numbers have been better, leading to higher chances of a
hike from the Riksbank as they are trying to get rid of negative interest rates. Norwegian GDP was close to expectations, showing -0.2% contraction
in August but after a very strong 0.8% increase in July; inflation has printed slightly stronger than forecasted with core inflation at 2.2%.
Core machine orders continued contracting, although at a slower pace. Household spending and earnings for August printed in line with estimates and slightly stronger than July numbers.
Outside of BrExit headlines, August GDP report showed 0.3% 3M/3M expansion, with -0.1% print for August driven by the weakness in manufacturing and industrial production, while construction recovered and services remained resilient.
GBP had its best two days in over a decade on reports that Boris Johnson reached an agreement with Irish PM during their meeting on Thursday, which was followed by positive headlines out of Europe on Friday.
Relatively quiet on the data front. Manufacturing PMI stayed weak in New Zealand at 48.4 and card spending in September were stronger than expected.
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