Prior Week Summary
The British Pound took the market for a ride last week as a confluence of forces briefly took the currency meaningfully and abruptly lower in disjointed and volatile trading. The “flash crash” in the Pound pushed the currency lower by 6 large figures relative to the Dollar over the course of three short minutes. The British Prime Minister, Theresa May, set the stage for the depreciation by publically advocating for a “hard” exit from the European Union by the end of the 1st quarter. Indeed, May has indicated that her government will invoke Article 50 “no later than the end of March next year…now it is up to the government to get on with the job.” Article 50 of the Lisbon Treaty defines the mechanisms that an EU member state must go through to withdraw from the Union. At the same time, the decline in traditional market making activities by consistent liquidity providers seems to have led to markets increasingly driven by algorithmic trading pools, which can be notoriously absent in times of uncertainty.
Here in the U.S., the Labor Department reported that 156,000 Americans were added to payrolls in September, following a gain of 167k in August. The gain was sufficient to keep expectations for a rate hike alive, with an implied probability of 68% by the December Fed meeting. The data, when combined with the recent strength in Oil, has served to steepen the curve and increase market derived estimates of forward inflation expectations closer to the Fed’s target level. Over the course of the week, the 2s/10s Treasury spread widened by nearly 8 basis points as the long-end repriced higher in yield.
The Look Forward
There is a relatively active data calendar this week, with updated statistics expected on import prices, retail sales, consumer and producer prices, in addition to the release of the September Fed meeting minutes.