The broader risk-off theme last week saw the yield on 10-year UST plunged to 234-year lows, eventually ending the week at 0.53%, 6bps lower on the week. Meanwhile the S&P 500 Index gained 1.73%, supported by blowout earnings from tech giants. The dollar remained on the backfoot falling to a two-year low last week, taking the monthly performance to -4.15%, the worst monthly performance in a decade. Oil floated around the $43pb area through the week while gold hit all-time highs, during the week. Renewed US-China tensions, following reports that the US is due to announce a series of measures against “a broad array” of Chinese-owned software, coupled with a pick-up in Covid-19 cases, particularly in the US, may lead to further mixed sentiment this week. We therefore remain comfortable with our positioning in high-grade, “wealthy”, sovereign and quasi-sovereign positions across the strategies.
Last week, the Fed meeting was pretty much as expected, no change to the fed funds rate, at 0-0.25%, and the central bank maintained its stance on UST and MBS purchases. As expected the Fed “committed to using its full range of tools to support the U.S. economy”. And of note Fed Chair Powell said: “We see core inflation dropping to 1%. I do think for some time we’re going to be struggling against disinflationary pressures rather than inflationary pressures.” The Fed’s favoured PCE core deflator reading for June marginally missed expectations for a 1%yoy reading, released at 0.9%. This will no doubt fuel further anaemic inflationary concerns.
Also of interest was rating agency Fitch’s downgrade of its AAA outlook for the US’ Long-Term Foreign-Currency (LTFC) from stable to negative, citing “ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan”. US’ output shrank by -33% in Q2’20, again the worst on record. Analysts predict the US economy to grow at +18% in Q3’20, however, even with this pick-up, growth will remain very depressed compared to pre-Covid levels. Elsewhere, Germany’s growth reading disappointed, with the economy contracting -10.1% in Q2’20 the worst reading since records began in the ‘40s. This reading was followed by further disappointment in Spain, France and Italy.
This week kicked off with the Caixin PMI reading for China, which beat estimations in June and remained in expansionary territory. Later today we will have the US ISM, construction spending and auto sales prints. There will also be a host of other PMI readings released through the week, which could give some further insight into economic activity in Q2’20. A fairly quiet Tuesday will see the US’ durable goods and factory orders for June. On Wednesday Cleveland Fed President Mester will discuss the economic outlook and in terms of data we have the US’ ADP reading for June, which could give some insight into what to expect at the employment report release at the end of the week. The BoE rate decision on Thursday will be watched by many, the central bank is expected to hold rates despite continued chatter of negative rate policy. We will also hear from Dallas Fed President Kaplan on the U.S economy as well as the NY Fed’s Daleep Singh at a South East Asian central banking forum. Friday’s highlight will be the US’ employment report, current market estimations are for +1578k jobs added in June, unemployment at 10.5% with average hourly earnings falling -0.5%mom.