Prior Week Summary
U.S. equities notched a third straight week of gains as investor sentiment received a boost on the back of a more-dovish-than-expected European Central Bank (ECB), easing trade tensions, and solid U.S. economic data. In a promising sign for trade negotiations, China released a list exempting 16 categories of U.S. products from 25% tariffs, beginning September 17th. The Trump administration responded quickly to Beijing’s olive branch postponing the implementation of a 5% tariff on $250 billion of Chinese goods to October 15th from October 1st, citing a desire to respect the 70th anniversary of the founding of the Peoples Republic of China on October 1st. Further improving the outlook, China said it would encourage companies to purchase U.S. agricultural products and would exclude U.S. farm products from any additional tariffs going forward. The developments come as the two sides prepare for face-to-face negotiations in Washington next month. On the U.S. economic data front, results were largely positive. Friday’s release of retail sales figures saw a 0.4% increase month over month, above analyst calls for a 0.2% gain. Inflationary measures, PPI and CPI, both posted levels above expectations with Core CPI rising 2.4% year over year.
The ECB cut its deposit rate by 10 basis points to -0.5% and signaled that rates will remain at “present or lower levels” until inflation moves closer to its “near but just below 2%” goal. Additionally, the ECB announced plans to revive its quantitative easing program by buying EUR 20 billion of securities per week beginning on November 1st. Speaking on the outlook, ECB President, Mario Draghi, noted, “We have headroom to keep going on for some time at this rhythm. We still think the probability of recession for the euro area is small, but it’s gone up.” Separately, a drone attack on a Saudi Arabian crude manufacturing plant sent crude oil prices soaring more than 10% over the weekend as roughly 5% of global output has been disrupted. Saudi Arabian officials estimated that a third of the lost output will be restored by Monday, and President Trump authorized the “release of oil from the Strategic Petroleum Reserve, if needed, in a to-be-determined amount, sufficient to keep the markets well-supplied.”
The Look Forward
All eyes will be on the FOMC’s two-day policy meeting beginning on Tuesday. Market participants widely expect the FOMC to cut the target range by 25 basis points to 1.75% - 2.00%. Updated figures on the Empire Manufacturing Index, industrial production, housing starts, and existing home sales dot the economic calendar, among others.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Fixed Income Snapshot
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