Markets
Investors yesterday had all the time in the world to asses today’s Fed meeting and the early month US data (ADPlabour report, non-manufacturing ISM and payrolls) given the empty eco calendar. Such a set-up mostly suggests technical trading. The US yield curve bull steepened with the 2y yield declining 4.9 bps and the 30y rising 0.1 bp, but the period between the end of tapering and the lift-off of rate hikes remains as source of debate. The repositioning on EMU yield markets was more impressive. The German 10y and 10y swap rates recently extensively tested the post-corona tops at -0.07% and 0.30%/0.32% respectively. The ST dynamics between real yields and inflation expectations often showed pronounced, even erratic-like swings. A break higher didn’t occur with the ECB still in wait-and-see mode. German yields dropped 5.7 bps (2y) to 7.4 bp (5y), with the very long end again the exception (+0.6 bps). Both inflation expectations and real yields eased, with the first taking the lead. The German/EMU swap yields last week easily recaptured a steep uptrend channel after a first setback. This probably won’t be that easy after yesterday’s decline. The correction in core yields also eased pressure on peripheral markets with the Italian spread narrowing by 8 bps. The moves in equities and FX again were much more modest. US equites extended their trip into record territory even as gains were modest (0.3%-0.4%). European indices traded mixed near recent cycle tops. After a soft start, the dollar regained ground despite the risk-on. USD/JPY closed little changed (113.96). EUR/USD failed to hold north of the 1.16 handle (close 1.1579). Sterling remains in correction modus (EUR/GBP close at 0.8506).
The calendar contains the US ADP labour report (expected job growth at 400k) and the US non-manufacturing ISM (expected stable near 62). Both series provide valuable info on how the US economy navigates through the complex of supply distortions and persistent price increases. Still an unconstrained reaction is unlikely ahead of the Fed. The Fed tapering bond purchases by 15bn/m with net buying ending mid next year is discounted. The focus will be on the inflation narrative and the ‘link‘ between the end of tapering and the first rate hike. The Fed statement simply stated in September: ‘Inflation is elevated, largely reflecting transitory factors’. The Fed pondering the risk of longerlasting inflation might support the case of raising rates rather soon after the end of bond buying. This should ease inflation expectations, support real yields and the dollar. Still Fed Powell might speak in conditional terms at the press conference. Even in such a scenario, the US 10y yield should hold north of 1.5%. In Europe, we look out how far the yield correction goes. 0.17%/18% is first reference for the EMU 10y swap. The Fed giving more weight on inflation should be positive for the USD. EUR/USD support at 1.1495 is key. We also keep a close eye decision on the National Bank of Poland. We assume the market/PLN might be disappointed if the NBP hikes by less than 50 bps.
News headlines
New Zealand employment grew 2% q/q in the previous quarter, crushing estimates of 0.4% and building on strong gains in Q2 of 1.1%. The increase came exclusively on the account of full-time jobs (+2.3% q/q). Hours worked slumped (-6.6%) as a result of lockdowns that still affected the economy in Q3. The unemployment rate hit a new pandemic-low at 3.4%, just shy of the series record low at 3.3% (2007) even though the participation rate equaled the previous multi-decade high (71.2%). Together with last month’s soaring CPI (4.9% y/y), the RBNZ is all but certain to hike policy rates back-to-back at the November 24 meeting. Despite the stellar jobs report, the kiwi dollar was no match for the strong greenback. NZD/USD slipped from 0.718 to 0.7111.
The US ramped up pressure again on OPEC+ to normalize production faster than the 400 000 barrels per day expected to be announced at tomorrow’s meeting. President Biden blamed the OPEC strategy for fuelling inflation while Secretary of State Blinken spoke with the UAE’s foreign minister on Tuesday to press for increased output. Their comments have created speculation the US may release strategic reserves if OPEC fails to raise production. Oil prices decline today, with Brent losing about 1% to $83.86/barrel.
