The Daily Update: The Week Ahead

The week started with a selloff in fixed income as the U.K. BoE Governor Bailey sounded concerned about rising inflation expectations and that the Bank would have to act if they rose. Global bond yields rose on this news until the release of U.S. Industrial production, missing by a massive -1.3% from +0.1% expected. Car production was a huge contributor to the number, -7% as the continued Semiconductor shortage held up production, with Utilities adding to the fall. Bonds stabilised although yields were higher on the day while stock markets fell initially only to regain composure throughout the session. Housing data in the U.S. also disappointed as building permits fell 7.7% (-2% expected) and home starts were down 1.6%.

The US Treasury announced their next round of T-Bill issuance which was far larger than previous or expected. This in the past would have caused disruptions in the market and supply concerns, however, the market took the news in its stride. This is due to the huge amount of money market funds are parking cash in the Fed’s Overnight Reverse Repo facility, (ON RRP), meaning that the Treasury can, for the moment, issue a significant amount of bills with a yield greater than the 5bp which is offered in the ON RRP without causing any disruption to the shorter end maturities.

Sinic Holdings Group Co (ranked 41st on the list of China’s biggest property developers) was the latest Chinese property company to hit the headlines for the wrong reasons. Sinic missed the coupon and principal payment on its $250million note which matured on Monday. According to Bloomberg, Sinic has $694 million of dollar bonds outstanding and had also missed domestic payments last month. This follows the shock default of Fantasia Holdings Group Co earlier this month. Watch this space, from afar, as we do.

The UK September Retail Sales release was by any standards a disaster coming in at -0.2% when the calls were for a plus 0.6% improvement, ex autos and fuel was even worse at -0.6% against plus 0.3% expected.

We wrote in our daily the SSC view on inflation. We maintain that the global pick up in inflation is predominantly transitory, however, from our experience inflation can be a sticky animal and may take longer than first thought to work its way out of the system especially with the current supply bottlenecks.

European PMI data was a little surprising in that German and UK manufacturing beat expectations, indeed Eurozone manufacturing came in at 58.5 against 57.1 expected and 58.6 in September. The UK composite was also strong at 56.8 with just 54.0 expected, as manufacturing and services beat the calls. U.S. PMI was a different story with Manufacturing down and services up leaving the composite at 57.3 versus 55 last time. We appear still not to be out of the period of strangely odd reports for all manner of reasons.

Markets finished the week with US 10-year yields around 1.65%, following comments from Yellen that high inflation through mid-2022 is expected, (however she rejected criticism that the U.S. risks losing control of inflation). Equities were on the quiet side as they waited for a busy week of U.S. tech earnings. Brent & WTI futures were higher after Saudi Arabia said that the OPEC+ alliance should maintain its cautious approach to managing global crude supplies given the threat to demand still posed by the pandemic.

The week ahead, we have the US Q3 GDP release on Thursday. In addition to that, notable releases are the consumer confidence measures, new home sales, durable goods orders and PCE. U.S. Treasury will auction 2y, 5y and 7y notes for $60, $61 and $62bn, respectively. The Fed officially enters its blackout period before the Nov 3 FOMC meeting and we will not be hearing from any officials next week.

In Europe there will be inflation data from Spain, Germany, France, Italy and the euro area at large, they come on Thursday and Friday. Those areas also report 3Q GDP Friday. We also have the U.K. budget on Wednesday. Not that we will have any surprises, as most of it will be either revealed or leaked beforehand.

As for Asia, South Korean third-quarter GDP tomorrow, Chinese industrial profits and Australian CPI arrive Wednesday, followed by Japanese jobless and industrial production data on Friday.