US data disappoints markets

The US ISM non-manufacturing print was much weaker than expected at 52.6 (55.0 expected), the lowest level since August 2016. Meanwhile, the manufacturing print fell to 47.8, the lowest in a decade and well below the expected 50.0 reading. US non-farm payrolls came in at 136,000 (versus 145,000 expected). Over the week, the 10-year Treasury yield fell as markets grew increasingly jittery over the economic outlook.

European economic activity continued to contract

The eurozone reading was confirmed at 45.7, with France at 50.1 and Germany at 41.7. French 10-year spreads were largely unchanged, while the 10-year bund yield fell slightly. Meanwhile, PMI data consolidated in emerging markets.

Chinese trade rhetoric softens

Factors helping sentiment included positive trade rhetoric and dovish Federal Reserve (Fed) expectations. US President Donald Trump said a delegation from China will visit the US next week to continue trade talks. Meanwhile, there are dovish expectations for the upcoming Fed meeting: the market is pricing in a 90% possibility of a rate cut.

Italy released its new budget

Italy released its new budget outlook document that sets a target for a 2020 deficit at 2.2% of GDP and aims to boost growth to 0.6%. Italian 10-year spreads tightened marginally.

Still no agreement on Brexit

The UK government published its proposals for a revised Withdrawal Agreement, including a replacement of the Irish backstop with a single regulatory zone covering Northern Ireland and the Republic of Ireland, with no customs checks near the border. In response, Irish Prime Minister Leo Varadkar said the proposals “do not fully meet the agreed objective of the backstop.” Over the week, 10-year gilt yields fell slightly.

In US credit, there was limited issuance due to upcoming earnings, with a real estate investment trust (REIT) and an aircraft leasing company coming to market.

Outlook

The Chinese trade delegation, led by Vice Premier Liu He, visits Washington for talks on trade this week.

FOMC minutes from the September meeting will be released on Wednesday. Fed Chair Powell will also be speaking on Tuesday.

The main data point this week is the September US inflation release. The Brexit negotiations continue, with the EU giving the UK Government until Friday to come-up with a revised offer.

By Adam Kibble, Investment Specialist

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