US Congress approves two-year budget plan as crisis blows over

Higher treasury yields, lower equities

KUWAIT: Last week had multiple market moving events, from the drop in equities market to the 2-year budget deal approved by the Congress to keep the US government running. The bill was passed with 71 in favor versus 28 in the Senate and 240 approvals in the House of Representatives against 186. The package is said to include an increase in US government spending by $300 billion over the next two years. Economists expect the deal to further boost the US economic growth alongside the recent passage of tax reform legislation at the end of last year. Additional support to the economic growth is due to Fed officials saying the plan to raise interest rates will only happen gradually.

Looking at the debt market, US treasury yields had a bull-run last week, rising up to 80 basis points since September 2017 lows. Government debt sales are set to more than double in 2018, lifting net issuance to $1.3 trillion, the most since 2010, according to estimates. With the Federal Reserve shrinking its bond holdings and deficits poised to swell even before taking into account the tax overhaul, all signs point to higher financing costs. The challenge going forward for Treasury Secretary Mnuchin is that some analysts expect buying by central banks may be reduced as reserve growth stabilizes; which makes the case for the more price sensitive buyers to play a role here such as private-equity firm, hedge funds and wealthy individuals.

Globally, the RBA and BoE had their monetary meetings last week. Both policy makers kept benchmark interest rates unchanged. A hawkish tone from BoE supported the sterling’s level after a disappointing service PMI at the beginning of the week. Similarly, the Australian dollar found support from the meeting as weak economic data surfaced last Tuesday.

On the currency front, the dollar index opened the week at 89.347 and gained 1.49 percent as further clarity on the status of the US government after the Senate deal announcement pushed the currency higher. The dollar index closed the week at 90.563. The euro started the week with a bearish move and broke the 1.2300 level to reach a low of 1.2204 towards the end of the week. The single currency eased as the greenback appreciated across the board, and closed the week at 1.2237. The cable traded sensitively prior to the BOE meeting, the cable moved in-line with a strong dollar and lost 1.72 percent but remained supported after a hawkish Bank of England meeting. The pair closed the week at 1.3835

US trade deficit

US trade deficit widened reaching $53.1 billion, its highest level since 2008. The driver to this increase was higher commodity prices in addition to higher domestic demand. Analysts are commenting on President Donald Trump’s ability to rewrite the American trading relationship with the world as the trade deficit increased. US exports grew 5.4 percent to 2.3 trillion while imports reached a record 2.9 billion in 2017. It is worth mentioning that the trade deficit was widening slightly each year since 2014, but the deterioration in 2017 was steeper than the previous years.

US trade deficit widens to $53.1 billion

US non-manufacturing PMI

The ISM non-manufacturing index came at 59.9, a jump above the expected 56.5. Fifteen out of eighteen non-manufacturing industries reported growth this month. It needs to be noted that the services sector is an essential component of the US economy accounting to 80 percent of the private-sector’s GDP. The rate of growth in the economy’s service sector perked up in January after its pace eroded in the prior two months. While the index of 17 non-manufacturing industries, such as real estate and food services, showed slowing growth in the past two months, the service sector has still seen continued expansion for eight consecutive years.

Hawkish BoE meeting

The MPC voted unanimously to keep interest rate at 0.5 percent and QE unchanged by consensus. Yet the tone of the language was perceived as hawkish by the market as the MPC stated “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent ... than anticipated”. The committee also raised the annual growth forecasts by 0.2 percent and 0.1 percent in 2019 and 2020 to be 1.8 percent in both years. This BoE’s forecast is the first for many years where there is a clear story of inflation being driven above target by domestic price pressures and excess demand. The market is currently pricing a near 70 percent probability of an interest rate hike in the UK, up from 42 percent at the beginning of the week.

UK PMI disappoints

The services PMI came at 53 against the forecasted 54.1. This figure is at 16 months low that was not seen since the blowback of the Brexit in September 2016. It shows a slowdown in the British economy as four fifths of UK’s GDP is derived from the services sector.

Eurozone growth

At a near ten-and-a-half year high of 58.0 in January, the final IHS Markit Eurozone PMI Services Index signaled a marked increase in output and came in above the earlier flash estimate of 57.6. The upward revision in the headline index mainly reflected stronger contributions from Germany and (on average) those nations outside of the ‘big-two’. The rate of expansion for Germany was the best since March 2011. Growth also improved in Italy and Spain (to 126 and six-month highs respectively), but eased in Ireland. Although the rate of expansion in France was slightly below that signaled by the earlier flash estimate, it was still faster than in December and one of the sharpest registered since mid-2011. The level of new business placed with euro area service providers rose at the quickest pace in over a decade in January. This exerted pressure on capacity, leading to a further solid increase in outstanding business. This combination of higher new orders and rising backlogs of work encouraged firms to take on additional staff.

China’s service sector shines

The Chinese services sector started the year with the highest reading since May 2012 coming at 54.7, and higher than the forecasted 53.6. Economists are attributing the swell in services to better access to bank loans and the Chinese market being energetic before the Chinese New Year celebration in mid-February. It was also pushed by the government supporting the services sector in an attempt to reduce the reliance on heavy industry and exports, as we saw on Thursday when the manufacturing activity came below expectations at 51.3.

RBA keeps rate steady

The Reserve Bank of Australia decided to keep interest rates at 1.5 percent. “The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” said Lowe, the governor of RBA. The Australian dollar was 0.1 percent lower against the greenback following the central bank’s meeting.

Kuwait

Kuwaiti dinar at 0.30025

The USDKWD opened at 0.30025 yesterday morning.