The Daily Update: The Week Ahead

After Columbus Day started the week on the slower side, inflation and energy concerns again weighed heavily on financial markets with Asian equity majors all giving up between 1% and 2% while Treasury yields continued to advance with 3yr up 3bps to 0.35% while 10 year remains above 1.6%. We also saw Brent continuing to hold gains above $83 while Coal futures marched to new record highs in China.

The Fed’s Bostic said that the lower than expected jobs number should not derail the taper timeline and that he doesn’t see much market impact from Fed’s taper. In his forecast, Fed’s rate lift off is still more than a year off, but sees inflation remaining above 2% going forward. Fed’s Clarida also reiterated that tapering is not a signal on the timing of rate hikes and that the inflation surge is largely transitory, however, bottlenecks are a ‘big unknown’.

UK data released demonstrated a moderate economic recovery with the UK unemployment rate at 4.5% (vs 4% pre-pandemic) with vacancies reaching 1.1m July-Sept (the highest level since records began in 2001).

Thursday we had the FOMC minutes from their September meeting. The minutes provided more details on tapering and the committee's inflation outlook. The minutes mentioned that around half of the respondents thought a November start to tapering would be appropriate and the other half thought December would be better. The minutes also outlined an “illustrative path” of taper, saying that the path should be simple, on a monthly basis and entail reductions in $10bn/$5bn increments of Treasury/MBS. On the inflation outlook, there was the expected discussion of inflation being transitory, but this time the tone felt a little more reflective around the uncertainty of how long that transitory period is, acknowledging that the supply chain constraints might last longer than previously expected.

We came into the office on Friday to find the S&P 500 closed its best day since March after robust Bank earnings across the street buyoyed market confidence. The theme extended to Asia on Friday with the Nikkei +1.8%, Hang Seng +1% and Shanghai Comp +0.4%. In the commodity space Oil rose in tandem with equities, Brent moved up towards $85 while Gold was unchanged. Market talk emerged that the SEC is poised to allow Bitcoin futures that sent the crypto currency above $59k while US treasury yields rose with the 30 year back above 2.03%. However, the continued flattening of the yield curve continued with short dated yields rising around 9bp on the week and the long end just +3bp.

According to various news outlets, Chinese authorities are in the process of relaxing restrictions on home loans at some of their largest banks, as they try to mitigate the fallout from the ongoing Evergrande saga as well as any contagion to the wider property sector. Sources close to those in the know said China’s financial regulators instructed some major banks to accelerate approval of mortgages in the last quarter as well as allowing them to apply to sell securities backed by residential mortgages to free up loan quotas, reversing a ban imposed early this year.

The week closed on a very strong U.S. retail sales report for September with the headline at 0.7% against -0.2% expected. Sales ex auto and gas was also stronger than the calls at 0.7% against 0.4% expected, this pushed 5 year treasury yields higher by 7bp closing at 1.12% and the long end +3bp at 2.06%.

This week is light on economic data in the U.S. with the focus on manufacturing and housing, as well as the Fed’s Beige Book on Wednesday. There are a decent amount of Fed officials speaking, almost all of them, scheduled speakers are Quarles, Kashkari, Daly, Bostic, Waller, Evans, Bullard, Williams and Powell, we await more tapering news. The Treasury will also auction $24bn of 20-year bonds and $19bn of 5-year TIPS.

In the Eurozone we have further inflation data but the focus will be on the PMI data on Friday. It is similar in the UK with the addition of the September Retail Sales report. In China we have had this morning a stronger Retail sales report at 4.4% against 3.5% expected, a weaker IP release at 0.2% when 0.4% was expected and a weaker 3rd quarter GDP release at 4.9%YoY.