Heightened Turkey-Syria-US geopolitical events remained a key focus last week, however, the Brexit deal or no deal headlines and the ongoing Sino-US trade developments captured market attention. Sterling enjoyed a rally following news of a Johnson-EU Brexit deal on Thursday, up ~2.5% over the week against the dollar. The pound is currently trading close to last week’s highs following the events over the weekend which included the request for an extension into the end of January 2020 (which PM Johnson doesn’t actually want, reports suggest that the letter hadn’t even been signed!). Interestingly, there was an enactment of a no deal contingency plan aptly named Operation Yellowhammer; we wait for the upcoming vote(s) this week for further clarity.
The offshore renminbi (up 0.14% vs dollar) didn’t appear fazed by the waxing and waning sentiment surrounding the Phase 1 agreement, this is apparently due to be signed at the Asia-Pacific Economic Cooperation Summit in Chile which commences on November 16. Meanwhile, the DXY Index tumbled a further 1.04% over the week following weaker than expected data prints and geopolitical concerns. The yield on the 10-year UST edged marginally higher to 1.76%. Brent dipped by 1.80% following global demand concerns.
The US Fed conducted its first $60bn per month T-Bill purchase, which the central bank has said will be used “to mitigate the risk of money market pressures that could adversely affect policy implementation”. This new reserve management tool was announced on October 11, and caught many market makers off guard. However, the move was intended to separate balance sheet management from the interest rate decision, which comes at the end of the month, and reiterate that it should not be considered quantitative easing. On the interest rate decision, Fed rhetoric remains mixed. Key economic data is not helping a data dependent Fed as the releases continue to surprise to the downside with the likes of the September retail sales figure missing expectations for a rise, and instead falling for the first time in seven months. According to the nation’s Beige Book growth expanded at “a slight to modest pace” in September, adding that a number of businesses “lowered their outlooks for growth in the coming 6 to 12 months”, with a few districts seeing a reduction in the labour force due to softer than expected orders. The probability of a rate cut later this month crept above 88% by the end of the week.
Elsewhere, following Monday’s soft trade data we had China’s inflation readings, CPI jumped to a six year high of 3% off the back of a ~70% increase in pork prices (from this time last year, African swine flu resulted in a shortage). PPI fell 1.2%, the lowest level since July 2016. Other data saw fixed assets and retail sales broadly match expectations, while industrial production in September surprised to the upside. China released weaker than expected Q3’19 GDP growth at 6%, fuelling fears of a global recession. Following the release, Mao Shengyong, spokesman of China’s National Bureau of Statistics said: “The national economy is generally stable, the economic structure is continuously optimized, and people’s livelihood and welfare are continuously improved,” adding that there is plenty of room to adapt monetary policy, as the recent spike in CPI has predominantly driven by volatile food prices.
For the fifth consecutive time the International Monetary Fund (IMF) downgraded its global growth forecasts. The Fund cut its global economic growth forecast for 2019 to 3%, down from 3.2%, citing the ongoing risks of trade wars, Brexit and emerging-market shocks. The IMF predicts the current trade war between China and the US will cut global growth by 0.8% next year alone. Looking further out, the Fund anticipates a rise in the global growth of 3.4% in 2020, down 0.1% from earlier estimates.
Aside from the delay to the Brexit vote, a busy weekend saw England, New Zealand, Wales and South Africa reach the Rugby World Cup semi-finals. Today’s Canadian elections will be watched closely by many and the UK housing data will be of interest. Tuesday is relatively quiet with US existing home sales the main data release. Mark Carney’s speech at the House of Lords on Wednesday could be interesting with little in the way of key economic data. The ECB’s rate decision follows on Thursday, the central bank is expected to stay pat. US durable goods, jobless claims new home sales and Kansas City Fed manufacturing will be watched closely, as will Euro-Area PMIs. Germany’s IFO reading and the auction of Kurt Cobain’s sweater (expected to fetch $300k) will be of interest on Friday. Sino-US trade rhetoric will be followed closely as China pushes for a removal of the current tariff and any additional tariffs as part of the more comprehensive deal.