28/09/2018

Market Update Tsys rallying, 10Y 3.03% (-2bps) along with core EGBs on ‘risk off’ after Italy set its budget deficit target at 2.4% of GDP vs 2.0% exp. Italian bond yields are 30-40bps higher, 5Y BTP/bund spd 45bps wider @240bps, ~40bps high of the highs reached in August, while Euro equities are off 2.0% led by a 4.4% decline in financials.  GOCs higher, in line with tsys, 10Y 2.40%, before July GDP data. Flattening in the GOC curve the main theme over the past week heading into month end, led by the long end,10s30s now inverted again. Yesterday’s successful 3Y reopening (0.5bps thru). In corps deposit notes have gotten a bid since the 5Y Royal bail in bond issue , seeing as it was priced fairly tight, and deposit notes will continue to look attractive on scarcity value in our opinion. 

News headlines

What Happened This Week in the World Economy and Why It Matters (Bloomberg) Predictable, and still a bit jarring: The Federal Reserve forged ahead on the tightening path, and big-buck tariffs between the U.S. and China took effect, plunging those two economies further into trade hostilities. Meanwhile, the Bank for International Settlements warns that central banks aren’t ready for a storm that could be coming.

Euro-Area Inflation Rate Climbs Above 2 Percent on Energy (Bloomberg) Euro-area inflation accelerated in September amid a surge in energy costs, while underlying price moves remained more subdued. The core measure of inflation, which strips out volatile energy and food, fell to 0.9 percent from 1 percent. That’s a blow to European Central Bank President Mario Draghi, who just this week cited faster wage growth and a “relatively vigorous” pick-up in underlying price pressures.

Kavanaugh’s Fiery Denial Gives Republicans Cover to Vote ‘Yes’ (Bloomberg) Brett Kavanaugh’s passionate denial of allegations of sexual misconduct may have convinced Republicans who want to vote “yes” to put him on the Supreme Court that they can overlook his accuser’s credible and moving testimony. In combative testimony to the Senate Judiciary Committee, Kavanaugh rejected accusations of sexual assault made by Christine Blasey Ford, a California college professor, just hours before. He bashed Democratic senators who criticized him, assailed media reports on the allegations, and claimed to be the victim of a conspiracy driven by anger over President Donald Trump.

Stocks Decline on Italian Budget Gloom; Oil Steady: Markets Wrap (Bloomberg) Stocks in Europe dropped along with U.S. futures at the end of a volatile quarter as political concerns and disappointing price data sparked a flight to the safety of core European bonds and Treasuries. Italian assets took a beating after the country’s populist leaders gained the upper hand in a battle over spending. The Stoxx Europe 600 Index retreated, led by Italian shares as the country’s benchmark headed for the biggest drop in more than two years. The nation’s yields climbed the most in four months after the government set a wider budget deficit than some investors had anticipated. German bunds led gains in core European bonds and the euro fell to a three-week low, extending their moves after data showed inflation in the common-currency area — after stripping out energy and food costs — unexpectedly slowed in September.

Bank of Canada says it will continue to raise interest rates gradually (Reuters) The Bank of Canada will continue to raise interest rates gradually, Governor Stephen Poloz said on Thursday, stressing that despite economic uncertainties, the bank did not want to let inflation momentum build. The central bank has raised rates four times since July 2017 and most market players expect another hike on Oct. 24. Poloz said that while the bank did not know exactly where the economy was heading, that did not justify inaction.

BlackBerry quarterly profit more than doubles (Reuters) Canadian software maker BlackBerry Ltd’s second-quarter profit more than doubled, helped by higher billings at its software and services business and lower costs. Net profit was $43 million for the second quarter ended Aug. 31, up from a profit of $19 million, a year earlier. On a per share basis, the company reported a loss of 4 cents, compared with a loss of 8 cents per share during the year-ago quarter. Revenue fell to $210 million from $238 million.

Tesla shares fall after SEC accuses Musk of ‘misleading’ investors (BNN) Tesla Inc. chief executive officer Elon Musk was accused by the Securities and Exchange Commission of misleading investors when he tweeted that he had funding lined up to take the company private. The SEC’s allegation, contained in a lawsuit filed fewer than two months after Musk’s August tweet, sent Tesla’s shares () down more than 11 per cent in after-hours trading. It sought unspecified monetary penalties and added a market-rattling request — that a judge bar Musk from serving as an officer or director of a public company.

No NAFTA doesn’t mean no Aaa rating for Canada, Moody’s says (BNN) Canada’s Aaa sovereign rating and stable outlook could probably withstand even the worst-case Nafta scenario in which no agreement is reached and the country faces new tariffs, according to Moody’s Investors Service. While the base case for Moody’s is for Canada to ultimately sign a new North American Free Trade Agreement with the U.S. and Mexico, the rating company is confident the northern nation would be able to adapt if no deal is signed and the U.S. slaps it with auto tariffs.

Overnight markets

Overview: US 10yr note futures are up 0.158% at 118-30, S&P 500 futures are down -0.33% at 2910.25, Crude oil futures are up 0.04% at $72.15, Gold futures are down -0.06% at $1186.7, DXY is up 0.42% at 95.289, CAD/USD is down -0.26% at 0.7687.

Cda Benchmarks	Yield	Tsy Benchmarks	Yield
2 Year	2.192%	2 Year	2.807%
5 Year	2.319%	5 Year	2.933%
10 Year	2.403%	10 Year	3.031%
30 Year	2.4%	30 Year	3.165%

US Economic Data

8:30 AM	Personal Income, Aug est 0.4% (0.3% prior)
	Personal Spending, Aug est 0.3% (0.4% prior)
	Real Personal Spending, Aug est 0.2% (0.2% prior)
	PCE Deflator MoM, Aug est 0.1% (0.1% prior)
	PCE Deflator YoY, Aug est 2.2% (2.3% prior)
	PCE Core MoM, Aug est 0.1% (0.2% prior)
	PCE Core YoY, Aug est 2.0% (2.0% prior)
9:45 AM	Chicago Purchasing Manager, Sep est 62.0 (63.6 prior)
10:00 AM	U. of Mich. Sentiment, Sep est 100.6 (100.8 prior)
	U. of Mich. Current Conditions, Sep (116.1 prior)
	U. of Mich. Expectations, Sep (91.1 prior)
	U. of Mich. 1 Yr Inflation, Sep (2.8% prior)
	U. of Mich. 5-10 Yr Inflation, Sep (2.4% prior)

Canadian Economic Data

8:30 AM	Industrial Product Price MoM, Aug est -0.4% (-0.2% prior)
	Raw Materials Price Index MoM, Aug (0.7% prior)
	GDP MoM, Jul est 0.1% (0.0% prior)
	GDP YoY, Jul est 2.2% (2.4% prior)