The past week did not provide much clarity around the situation of Evergrande. While market sentiment rebounded strongly, the fate of China’s second-largest property developer remains unclear. The Chinese central government could let Evergrande fall, but we think it will likely attempt to ring fence the effects on the country’s financial sector to avoid a broader crisis. Furthermore, only USD19bn of Evergrande total debt of USD300bn is denominated in USD, so the direct effect on the rest of the world from the possible bankruptcy should remain limited. Read more in Research China – The Evergrande situation and what we expect, 21 September. Next week, more debt payments are due on Wednesday, and markets will also focus on PMIs on Thursday for gauging developments in the broader economy, we expect to see further decline.
Fed took a relatively hawkish stance in its September meeting. While no exact decision was made, Powell gave strong verbal indication that Fed will most likely begin tapering in November, and conclude the process by mid-2022. Fed’s median estimate saw core inflation running above 2% through the forecast horizon stretching until 2024, but Powell argued that the current inflationary pressures still mostly reflected transitory factors. Read more in Fed Research – Review: Fed is about to start a tightening cycle, 22 September.
Among other central banks, Norges bank delivered the long-awaited first hike and a hawkish shift to the rate path, while Riksbank maintained its rate path flat, read more in the Scandi section below. Market interpreted Bank of England‘s September interim meeting hawkishly, as 2 members voted for lower asset purchases. Market is now pricing in the first 15bp hike already for March 2022.
Next week, markets will closely follow a series of Fed speeches throughout the week, as Powell noted that there was broad-based support for the current tapering plans. On the US data front, private consumption data released on Friday will signal whether US goods consumption has remained elevated. Consensus expects a slight drop in the September ISM Manufacturing index released on Friday after Markit’s counterparts declined modestly this week. Finally, Fed’s preferred measure of inflation, the PCE, will also be released on Friday.
In Europe, ECB’s annual forum will take place on Tuesday and Wednesday, and the focus will be on the strategy review published last July (for a recap, see Flash: ECB Research – Strategic Review: Striving for symmetry, 8 July). While near term monetary policy outlook is not on the agenda, we may receive a number of sources stories and official interviews at the same time. We will also get the
September flash HICP on Friday where we likely are going to see a further rise in inflation on the back of rising energy and core inflation, not least with the natural gas and electricity price surge. We look for 3.3% for headline and 1.8% for core. We recently revised our Euro Area inflation outlook higher, take a closer look at Research Euro Area – Rising pipeline pressures for euro inflation, 17 September.
In Japan, the ruling liberal democratic party will elect a new party president on Wednesday, who will also become the new Prime Minister. For markets, this will primarily be important for the prospects for the green transition.
