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  • The focus was firmly on the UK, with sterling having a bumper week; up 3% versus the US dollar. This set the tone for bond markets which were hit hard as higher interest rates were priced in by markets. Stock markets were solid but overseas earners struggled as sterling strength swamped any gains. This week the focus will shift to US policymakers, with the Federal Reserve making their decision on interest rates on Wednesday night (our time); this could well cause more choppiness in bond markets.

    Last week

    Strong week for the pound; highest level in over a year

    Stocks were solid but currency impact was key

    Bond markets sold off aggressively

    Bank of England kept rates on hold

    UK inflation pushed higher

    Chinese data disappointed

    US inflation rose​

    This week

    Given the focus on the UK last week, Mark Carney’s speech this afternoon will be worth a watch for any clues on upcoming policy at the November bank meeting.
    Tuesday sees the Eurozone economic survey data (ZEW) being published.

    Wednesday is when the action hots up. In the UK, we have Retail Sales numbers.
    In the US, the Federal Reserve announce their decision on interest rates. There will also be a press conference from Janet Yellen.

    Thursday morning sees the Bank of Japan announce their decision on interest rates along with a press conference from Governor Kuroda.

    Last Week's Highlights
    The British pound had an excellent week and was up 3% vs the US dollar, with much of the gain happening towards the end of the week post the Bank of England’s meeting on Thursday. Despite voting 7-2 to keep rates on hold, Governor Mark Carney said that with rising inflation and growth, the UK should prepare for a rate hike in "the coming months". Fuel was added to this by comments from external member Gertjan Vlieghe on Friday when he said that we are approaching the moment when the bank rate may need to rise.

    Stock markets actually had decent returns last week, but much of this was washed out for UK investors due to the strength in the pound which wiped out overseas gains. Sterling hedged global equities were up 1.3% for the week, with their unhedged counterparts down 1.6%. Japanese stocks were up 3.3% on a currency hedged basis and were the best performing regional market. On a sector level, banks did best (as they benefit from higher interest rates) and areas such as Consumer Staples and Energy fared best.

    Next was the best performing stock in the FTSE 100 for the week, up 15.87%. This rise came on the back of some upwardly revised price targets from a handful of sell-side banks after the group surprised with a confident first-half results statement and raised full-year guidance.

    Bond markets were the big casualty of the week, with UK government bonds dropping 3% and UK corporate bonds down 2.2%. This big downward move came as bond yields rose sharply to reflect higher UK interest rates which are being implied both through the high inflation numbers but also the rhetoric from UK central bankers and their calls for higher rates.

    UK interest rate expectations shifted dramatically over the course of the week and this accounted for much of the move in sterling. Market based measures for predicting the next interest rate hike are now pricing in a 62% chance of a rate rise at the November meeting for the Bank of England with much of this driven by inflation. We expect RPI to top 4% by the next reading in October. Just two weeks ago, the next rate rise wasn’t being priced in until September 2018. ​

    UK inflation numbers came out last week and matched the five-year highs which were set in May this year, with CPI coming in at 2.9% (from 2.6%) and RPI coming in at 3.9% (from 3.6%). CPI is getting close to the level where Mark Carney will start having to write monthly letters to Chancellor Philip Hammond explaining why it is more than 1% away from the 2% target. We expect the CPI number to get to 3% next month which would cue such letter writing. Unsurprisingly, much of the rise came from the weakness in the currency over the last year, with clothing and petrol being the key drivers in the uptick.

    US inflation surprised to the upside, with the core consumer price index by 1.7% over the year, giving confidence that inflationary pressures are still apparent, after months of poor price data. Other US data, such as Retail Sales and Industrial Production was a bit weak, but some of this weakness reflects the impacts of Hurricane Harvey.

    Chinese data for August was softer than expected but is far from low. Fixed asset investment was up by 7.8% (year-to-date), industrial production is 6.0% higher over the year, retail sales growth rose by 10.1% over the year and money supply growth slowed in August.
    Asset Returns

    Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

    The pound had an excellent week and is now at a one-year high

    Source: British  Pound  vs US Dollar  Over One Year - Bloomberg / Psigma

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