The Daily Update: The Week Ahead

At midnight last Friday, the media embargo went into effect and so there were no Fed speakers until Chair Powell’s press conference after the FOMC statement on Wednesday. If the previous week’s Fed speakers are any indication, the Fed is ready and willing to announce tapering at the upcoming meeting. Indeed, Powell himself said earlier on Friday that “The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation.” He added that “I would say our policy is well-positioned to manage a range of plausible outcomes. I do think it’s time to taper and I don’t think it’s time to raise rates.”

Monday’s record S&P close helped by decent earnings being reported and improving sentiment spilled over into Asia on Tuesday with the Nikkei closing +1.8% and Kospi +1%. Treasuries were steady with the ten-year at 1.62% as Oil remains at lofty levels trading just below $84 a barrel.

Tesla became a trillion-dollar company after the stock jumped over 12.5% after it was announced that the car rental Hertz had ordered 100,000 Tesla cars as part of an ambitious plan to begin to electrify a large part of its fleet. The deal is the single largest order ever for electric vehicles, and worth nearly USD4.5bn in revenue to Tesla. Unlike most other purchases by rental companies, in that there is a big discount by the car maker to secure the deal, the size and worth to Tesla implies that Hertz is paying close to list prices.

Tesla delivered just over 241,000 electric cars globally in the third quarter, so order represents approximately 10% of their annual production, which may bring its own problems due to the ongoing supply chain disruptions and the time required to ramp up production at the new factory in Texas.

US Treasuries continued to be range bound mid-week, whilst the S&P took out another new high. This was opposed to Asian bourses that were on the back foot after US regulators banned China Telecom.

In Europe Germany revised its forecast for economic growth significantly lower this year as the ongoing effects of the pandemic, higher energy costs and supply chain disruptions continue to drag on Europe’s largest economy. The cut, to 2.6% this year, compared with a projected 3.5% growth in April, reflects a ‘scarcity in some raw materials and rising energy prices, particularly for gas’ Peter Altmaier, the Economy Minister said in an interview this morning. However, it was not all bad news, as the government now expects GDP growth for 2022 to rise to 4%, from an earlier forecast of 3.6%. For 2023, the expectation is for growth to normalise to an expansion rate of 1.6%.

Here in the UK the gilt market staged its biggest one-day rally since March last year after stronger than expected economic recovery boosted tax receipts. The Office for Budget Responsibility (OBR) revised up its forecasts for UK growth and now expects the UK economy to return to its pre-pandemic level at the turn of the year. The OBR estimates the U.K. economy to grow by 6.5% in 2021 (the fastest growth rate since 1973), up from its previous forecast of 4%, and projects growth of 6% in 2022. The OBR also revised its unemployment forecast to 5.2%, down from 12%.

This in turn will allow the UK government to reduce its planned debt sales by much larger than the market had anticipated, slashed to just under GBP200bn. There had been wide expectation that the UK would reduce bond sales, however the size of the reduction took the market by surprise. The ten-year gilt rallied to .97% at one point, it traded at over 1.21% just 7 days ago. The thirty-year yields fell 1.12%, from over 1.51% a week ago.

We also had the surprise decision by the Bank of Canada to end its QE program plus accelerating the potential timing of future interest rate increases. In a statement the BoC announced it would end its bond-buying stimulus program, as well as raising rates as early as the second quarter next year, alluding to Canada's robust economic growth, high COVID-19 vaccination rates, and strong employment gains.

However, the ECB kept policy unchanged, but it will continue buying bonds at a pace ‘moderately slower’ than in the last two quarters. In the press conference after the announcement Christine Lagarde, the European Central Bank President was pushed on inflation, where she was at pains to convince that their analysis confirmed it is transitory in nature, even if a bit stickier than first thought. Lagarde said the ECB had done much ‘soul-searching’ over its stance, however, concluded that inflation was still temporary, and as such any policy response would be premature.

Lagarde was also pressed, three times in fact, about market expectations for an interest rate hike in mid to late 2022. She said this was out of line with the bank's policy guidance, reiterating that rates will not rise until inflation across the euro zone is seen back at target by the middle of the forecast period and set to hold there. She also mentioned that ECB analysis wasn’t compatible with a rate hike any time in 2022 and even in the following year or so.

As we headed into trick or treat weekend on the final trading session of October we saw declines in European sovereign bond markets after Lagarde’s comments. 10-year US yield continued to be range bound awaiting the FOMC meeting. The S&P took out yet another new high, now up over 22.5% year to date. WTI stuck close to the $83 a barrel level with many now calling $90 by year end.

The week ahead, all eyes will be on the central banks. The Fed should begin its taper, however, it’s all about what is said afterwards. Following Lagarde’s comments last week the market will focus on how Powell responds to recent shifts in market pricing in his press conference. Whether the UK rate hike or not is a close call for the BoE on Thursday (the swaps market sees around 45% odds of a hike this week).

In the US we also have NFP on Friday.

In the EU. German factory orders and industrial production data for September are due Thursday and Friday.

In Asia, The Reserve Bank of Australia meets tomorrow. At its last meeting, it confirmed the reduction of its bond purchases but extended them until mid-February 2022. South Korean October inflation data is due Tuesday

Plus OPEC+ meets on Thursday to discuss its supply plans. The meeting comes as there are reports that there is growing pressure from governments globally to increase production. Leading the calls, the US, Japan and India are said to be putting the strongest diplomatic pressure on the cartel in years.

Enjoy the week ahead.