Head of Fixed Interest Research
Economic Overview, Richard Carter
The highlight last week was another interest rate hike from the Federal Reserve. The move was more than justified by the ongoing strength of the US economy and we expect a follow-up hike in December. The likely path of interest rates in 2019 is much less certain though and will largely depend on how inflation behaves as well as any possible drag from trade disputes. On that front, the news was good over the weekend with the Canadians agreeing to join the US and Mexico in a revised version of NAFTA although US congressional approval will still be required.
The other big story was the Italian budget. The populists showed who is in charge by pushing through a target of 2.4% of GDP for the fiscal deficit which was considerably higher than investors had expected. It may not sound much but it puts Italy on a collision course with the EU because it breaches commitments made relating to debt reduction. It will also attract the ire of the rating agencies and could possibly lead to a further downgrade of Italy’s rather lowly sovereign credit rating. Italian debt sustainability within the Euro remains something of a hot topic for bond investors and markets in general given the huge amount of debt outstanding.
On the data front, there was weakness in some manufacturing PMIs including China which was presumably due to trade disputes and the rising oil price. However, the UK one bucked the trend by rising to 53.8 and this continued the recent run of fairly decent UK data. This week will see the release of the US ISM and nonfarm payrolls while, in the UK, the main focus will probably be on the Theresa v Boris show at the Tory party conference.
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