Markets
When the Fed meets, markets stop trading. So it seems, at least. Instead of risking to be wrongfooted ahead of chair Powell presenting the conclusions of tonight’s policy meeting, investors simply sought the sidelines of the trading arena. It took a blow-out ADP job report and likewise non-manufacturing ISM to cause ripples in the stoic market sea. According to the “unofficial payrolls”, employment grew with 571k in October, crushing estimates of 400k even if we account for the downward revision for last month (532k from 568k). Leisure and hospitality (185k) pulled the services sector with professional and business services (+88k) and trade & transportation (+78k). In goods-producing, construction (+54k) and manufacturing (+53k) both thrived. The US non-manufacturing ISM was outright strong with new orders jumping from 63.5 to 69.7 and business activity from 62.3 to 69.8. Together with an increase in supplier deliveries (from 68.8 to 75.7), they make up the bulk of the steep rise in the headline figure from 61.9 to a record high of 66.7. Short-term US bond rates jump with the 2y yield up 4.3 bps for the day. Longer tenors pared all (10y, +1 bp) or much of the previous declines (-1.7bps, 30y). The German curve bull flattens as well, with changes up to -2 bps (30y). Peripheral spreads narrow 3 (Greece) to 4 bps (Italy). The dollar trades mixed against its majors yet gains against the JPY and EUR. EUR/USD edges lower towards the 1.156 area. USD/JPY trades north of 114. Stock markets trade slightly in the defensive in the US and more or less unchanged in Europe.
Packed with the recent strong data, the Federal Reserve is all but certain to announce the start of tapering tonight. We foresee a pace of $15bn/month (10bn govies, 5bn MBS) to end net-buying mid-2022. Other policy tweaks are unlikely given the meeting goes without new growth, inflation and policy rates projections. That said, we do keep an eye at the central bank’s narrative on inflation. Will it stick in camp “team temporary” – much like the ECB last Thursday – or will we spot a gentle shift towards acknowledging the more persistent nature of current price pressures? The latter may come under the form of subtle wording changes that downplay the temporary element or via clearer hints that could include the Fed’s vigilance on inflation. This is not unreasonable to expect given Powell’s closely watched inflation indicators, outlined at Jackson Hole in August, are at the very least flashing orange. Such a scenario would favour US yields and the USD. Look out for key support in EUR/USD at 1.1495.
News Headlines
Inflation in Turkey rose 2.39% M/M and 19.89% Y/Y (from 19.58%) in October, the highest level since January 2019. In a yearly perspective, food and beverages (27.41%), hospitality (25.23%) and household equipment (23.03%) were the main drivers. Core inflation slowed marginally to 1.79% M/M to 16.82% Y/Y. On the other hand, PPI inflation accelerated to 5.24% M/M and 46.31% Y/Y, suggesting that price pressures are still building. The Turkish lira lost modest ground after the data (EUR/TRY trading near 11.20). Higher inflation makes the real policy rate more negative. Recently some communication of the Turkish central bank (CBRT) focused on more on core inflation rather than the headline measure. This makes markets ponder the risk whether the small ‘decline’ in core inflation might cause renewed political pressure on the CBRT to cut rates further after 3% cumulative rate cuts since September.
The US Treasury announced that it will reduce the quarterly sale of long-term debt in the November-January quarter. Next week’s sale of 3-y, 10-y and 30-y bonds will amount to $120 bln, $6 bln less than the first auction series of bonds with a similar maturity in the previous quarter. Treasury statement reads: ‘Based on the latest fiscal outlook, current auction sizes are projected to provide excess borrowing capacity over the intermediate term [allowing it to start] with modest reductions over the upcoming November 2021 to January 2022 quarter.’ ‘The changes in nominal coupon and FRN auction size […] will result in a $84 billion reduction of issuance to private investors during the November 2021-January 2022 quarter compared to the August-October 2021 quarter’.
