The flatter US curve is a fair warning for 2018

In October, US macroeconomic data was strong: the ISM manufacturing index rose to 61, durable goods orders increased by +2.2%, retail sales rose to +1.9%, and the University of Michigan sentiment index climbed from 95.1 to 100.7. Unemployment data was probably affected by the hurricanes, with a surprising -33,000 job losses. Nevertheless, the unemployment rate still decreased from 4.4% in August to 4.2% in September.

Monthly Fund Commentary
24 Nov 2017

In October, US macroeconomic data was strong: the ISM manufacturing index rose to 61, durable goods orders increased by +2.2%, retail sales rose to +1.9%, and the University of Michigan sentiment index climbed from 95.1 to 100.7. Unemployment data was probably affected by the hurricanes, with a surprising -33,000 job losses. Nevertheless, the unemployment rate still decreased from 4.4% in August to 4.2% in September.

As usual, inflation was still a concern. The CPI reached +2.2% and the average hourly earnings rose to +2.9% YoY. The PCE deflator YoY however remained steady, reaching +1.6%. Regarding the Fed, all eyes were focussed on President Trump’s decision to unveil the name of the new Fed Chair. The minutes from the September meeting indicate that another interest rate increase is likely in December. The Federal Open Market Committee (FOMC) expects to continue raising interest rates gradually, mentioning solid growth, strong labour market and a healthy global economy.

In Europe, the Eurozone unemployment rate appears to have stabilised at 8.9%. The most remarkable data related to the published German Ifo Business Climate Index, which surged to a record level of 116.7. As expected, the ECB will continue its monthly asset purchases of EUR 60 billion until December, followed by monthly purchases of EUR 30 billion until September 2018. The program however remains open-ended, to cater for a potential decline in economic growth or a sluggishly remaining inflation rate. The ECB declared that the maturing debt will be reinvested for an “extended period of time after the end of its net asset purchases, and in any case for as long as necessary”. Against the backdrop of increasing concerns around political turmoil in Catalonia and Spain, markets clearly perceived this announcement as a dovish tightening policy.

In this context:
• the 2y US Treasury yield increased from 1.48% to 1.60% (+12bps),
• the 5y yield rose from 1.94% to 2.02% (+8bps),
• the 10y yield increased from 2.33% to 2.38% (+5bps),
• and the 30y yield rose from 2.86% to 2.88% (+2bps).

In Europe:
• the 2y German yield decreased from -0.69% to -0.75% (-6bps),
• the 5y yield declined from -0.27% to -0.35% (-8bps),
• and the 10y yield Bund fell from 0.46% to 0.36% (-10bps).

On the credit side:
• the European iTraxx Main decreased from 57 to 50bps,
• while the US corporate CDX index decreased from 56 to 52bps.

In Emerging Markets:
• the CDX 10y EM index fel l from 251 to 235bps (-16bps).