Earlier in the week we noted that there was so much good news around, a period of consolidation was only to be expected. The S&P 500 duly posted its first weekly loss since September. The FTSE 100 once again suffered altitude sickness above 7500, closing the week down 1.5% at 7430, suffering its biggest loss in 2 months. The FTSE 250 had an even worse week falling over 2%. Another week in paradise for Theresa May, as the Conservative party continues to lose cabinet ministers. The Brexit negotiations continue without many signs of progress. Remarkably, despite all the political uncertainty the pound gained ground on the week against the US dollar, and the euro. The US dollar did lose ground against its basket of other currencies, latterly over concerns once again that any US tax reforms could be delayed. The Vix index rose almost 20% on the week, closing the week back over 11.
Bond yields likewise rose on the week, the ten-year US treasury yield back at 2.4%, and yields on the 2-year also rose, at 1.67% that is the highest since 2008. 10 year gilt yields likewise rose on the week. Not only have US treasury yields risen in the past weeks, so has high yield credit. This is obviously the riskier end of the bond market and a fall in this asset class can be a lead indicator for a wider period of risk aversion in other assets. So far this has not been the case. Despite the continued tensions between Saudi and Iran, and the weaker US dollar the price of oil gave back a little ground, however, the price of Brent crude remains above $60 a barrel.
There is constant speculation around the impact Brexit is having on the UK economy, this week we saw Industrial and Manufacturing data along with construction for September. Industrial and Manufacturing production came in ahead of expectations, however, construction came in below. Net-net this data will probably have limited impact on assumptions for GDP for the third quarter. Looking to the week ahead we get inflation data on Tuesday, forecasts are for inflation year on year rate to drop back from 3.1% in September to 3%. It will still require the Governor to put quill to parchment to write to the Chancellor. More data this Wednesday as we get unemployment and wage growth. Wage growth is important to see by how much growth in earnings continues to lag inflation.
Donald Trump wraps up his trip around Asia this week and so far, it has been notable for its lack of controversy, still, there are a few days left for a few headlines to be made. It’s another busy week for US data, inflation, retail sales, manufacturing and building as well as speeches from several members of the Federal Reserve. As for Europe, we get the second estimate for third-quarter GDP. There is some expectation amongst economists that the first estimate for q3 growth in the region will be modestly upgraded.