Week In Review

Brexit Breakthrough

A review of the week's top global economic and corporate news. 

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For the week ending 8 December

  • Brexit milestone reached

  • US payrolls exceed expectations, wages lag

  • US averts government shutdown

  • IMF issues China warning

Global equities firmed this week in the wake of progress being made on the US tax reform front. US bonds saw little net change on the week, with 10-year notes changing hands at a 2.38% yield on Friday morning. Oil dipped slightly this week, with a barrel of West Texas Intermediate crude trading at $57.10 from $58.50 a week ago. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), slipped back below 10, to 9.80 from 11.50 last Friday.

MACRO NEWS

UK reaches Brexit deal with EU
After falling short of reaching a deal last weekend, the British government and the European Union managed to come to an agreement at the end of the week, just in time for next week’s EU summit. The pact includes a financial settlement, protects the rights of EU citizens residing in the United Kingdom and guarantees no hard border between the Irish Republic and Northern Ireland. EU demands on these critical issues having been satisfied, talks will now include future trade arrangements between the two sides.

US reports strong payrolls, weak wages
Nonfarm payrolls increased a better-than-expected 228,000 in November, while the unemployment rate held steady at 4.1%. Average hourly earnings advanced 0.2% last month after declining a revised 0.1% in October. Year-over-year wage growth remains stuck around 2.5%. November was the 86th straight month of net US job creation, which should cement expectations of the year’s third rate hike when the Federal Open Market Committee (FOMC) meets next Wednesday.

US avoids government shutdown
The US House of Representatives and the Senate each passed a continuing resolution funding the US government for the next two weeks. Another legislative showdown is expected around 22 December, when the Democratic minority will seek to advance its spending and policy priorities in exchange for votes to fund the government till the end of the fiscal year in September. Republican leaders hope to complete tax reform legislation before having to turn to budget matters, a very ambitious timetable.

IMF: China’s economic model has reached its limits
The International Monetary Fund warned this week that China’s debt-fueled investment and export-driven economic model has reached its limits. The fund stress-tested 33 Chinese banks, and outside of the big four, found substantial weaknesses, with many banks deemed to be undercapitalized. The IMF called on China to deemphasize high growth in gross domestic product, which incentivizes local governments to extend too much credit and to protect failing companies. Ballooning debt adds financial risks and may weigh on economic growth in the future, the IMF concluded.

Eurogroup elects new leader
The Eurogroup, the informal group of eurozone-country finance ministers, elected Portuguese finance minister Mario Centeno to a two-and-a-half-year term as their new leader this week. He will replace Dutch finance minister Jeroen Dijsselbloem in January. The Eurogroup came into existence to help manage the banking crisis that nearly torpedoed the euro earlier in the decade.

German grand coalition odds improve
Germany’s Social Democratic Party (SPD) reelected Martin Schulz as its chairman on Thursday and gave him a mandate to begin talks with Angela Merkel’s Christian Democratic Union (CDU) to form a government more than two months after the general election. Three-party talks that did not include the SPD broke down several weeks ago, upping the chances that Germans would have to return to the polls to break the deadlock. The odds that the parties will be able to cobble together a government improved with a patriotic appeal to the SPD by German president Frank-Walter Steinmeier asking that the SPD consider forming a grand coalition with Merkel’s party and its sister Christian Social Union (CSU). Heading into September’s election, the CDU and the SPD governed in such a coalition.

Central bank meetings dominate calendar
Three monetary heavyweights meet next week to set interest rates, but only the US Federal Reserve is expected to adjust monetary policy when the FOMC meets on Wednesday. A quarter-point hike is fully priced in by the market, which would raise the federal funds rate target range to 1.25%–1.50%. The European Central Bank and the Bank of England are both expected to maintain low rates for the foreseeable future. Observers will closely watch the Fed’s “dot plot” to gauge the number of rate hikes the central bank expects to put into place in 2018. Many expect the Fed to signal three additional hikes next year, on top of the four they have put in place since December 2015. 

THE WEEK AHEAD

Date

Country/Area

Release/Event

Tue, 12 Dec

United Kingdom

Consumer price index

Tue, 12 Dec

United States

Producer price index

Wed, 13 Dec

UK

Unemployment

Wed, 13 Dec

eurozone

Industrial production

Wed, 13 Dec

US

Consumer Price Index, Fed meeting

Thu, 14 Dec

China

Retail sales, industrial production

Thu, 14 Dec

UK

Retail sales, BOE meeting

Thu, 14 Dec

eurozone

ECB meeting

Fri, 15 Dec

US

Industrial production

 

 

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg New; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.

This content is directed at investment professionals only.  

 

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