We started the week with a plethora of Fed speakers giving their thoughts after the FOMC meeting where members signalled that they were nearly ready to start tapering.
There were comments from Fed’s Brainard, Williams and Evans who all reinforced the message that the Central bank will begin tapering soon. Brainard added that “no signal about the timing of lift-off should be taken from any decision to announce a slowing of asset purchases.”
Williams emphasised that a full recovery means a recovery in employment, not just a lower unemployment rate: ‘The participation cycle lags behind the unemployment cycle, which is an important feature to keep in mind in assessing the state of the labour market’.
Evans brought forward his preference for a rate lift off to 2023 from 2024, calling for a gradual tightening from there if inflation looks set to hold around 2%. ‘The economy will be on a stronger footing and hopefully we'll be looking at an environment where we can be looking to remove’ some rate stimulus ', he said, adding the key is making sure the public buys into the Fed's longer-term inflation goals.
Also, it was announced that both Dallas Fed President Kaplan and Boston Fed President Rosengren would retire. Kaplan in early October and Rosengren having gone already. The announcements come at a time when they were both under scrutiny for personal account trades
In commodities, oil built on its recent rally, with Brent & WTI futures trading at $80.1 and $76.1 and natural gas sits at a 7-year high on supply concerns going into winter.
Midweek both treasuries and US equities sold off in tandem (US 10yr trading to 1.54%, its highest since June) and the USD rallied as risk appetite came under severe pressure. Whilst a specific catalyst was unclear, one factor that was clearly linked to the moves was concern over rising energy prices and its impact on both consumer confidence, negative and inflation, positive. We also saw ongoing fuel shortages in the UK contributed to sharp upward / steepening pressure on UK gilts, dragging the 10yr gilt to test 1.0% for the first time since 2019.
In Japan, Fumio Kishida won the race to become Japan’s next Prime Minister, replacing Yoshihide Suga as leader of the Liberal Democratic Party, who stepped down after serving only one year since taking office last September. Kishida is widely regarded as a reliable pair of hands, despite a low-key presence that has sometimes been characterised as a lack of charisma. He has pledged to spend big on a new pandemic stimulus whilst vowing to tackle income inequality and move away from the neo-liberal economics that have dominated Japanese politics for the past two decades.
It was announced that Evergrande, struggling to avoid defaulting on its mountain of debt, said it plans to raise USD1.5bn by selling part of its stake Shengjing Bank to a state-owned asset management company. As part of the deal Shengjing Bank, who are one of Evergrande’s main lenders, has demanded that all net proceeds from the disposal be used to settle the financial liabilities according to an exchange filing.
Figures out on Thursday showed a mixed picture of the global economy. Industrial production in Japan in well below estimates at -3.2% month-on-month and 9.3% year-on-year (-0.5% and 12.1% eyed) as well as China’s September purchasing managers’ index (PMI) falling to its lowest level since the coronavirus outbreak, dropping to 49.6 against a surveyed 50, down from 50.1 in August. The UK did somewhat buck the trend with GDP rising 5.5% versus a forecasted 4.8%, leaving the UK’s GDP just 3.3% below pre-pandemic levels, revised down from the 4.4% previous estimate. GDP growth in the year to Q2 was 23.6%, which again is higher than the 22.2% prediction.
Goldman Sachs also cut their forecast for China growth this year from 8.2% to a (mere) 7.8%, reasoning that ‘A relatively new, but tightening, constraint on growth comes from increased regulatory pressure to meet environmental targets for energy consumption and energy intensity’. This comes on the back of other Investment houses, Citi, Nomura and JP Morgan as well as Fitch also reducing their 2021 growth forecasts to the world’s second largest economy.
The ongoing spat between France and Australia over the cancellation of a multibillion-dollar submarine contract escalated to an Australia-EU problem after the European Union postponed for a month the next round of negotiations for a free trade agreement with Australia. The rescheduling comes after France publicly stated that it can no longer trust Australia's government, accusing both Australia and the United States of stabbing it in the back.
The first day of the final quarter of 2021 started on a slightly more positive note, even with macro headwinds impairing sentiment to risk assets in the face of a faster fed, inflationary pressures and a regulatory crackdown in China. The greenback's rally continued, lifting it to new highs for the year against sterling, the euro, and yen. Oil and gas continued to tread water near year highs.
We had Powell re-emphasising the possibility of supply-chain bottlenecks leading to a longer period of high inflation, however long-term inflation expectations are broadly at the Fed’s goal level. He also said that he expects to see more inflation relief in the coming months and remains open minded about how far labour participation can rise.
The highlight for the week ahead will be Friday's Nonfarm Payrolls report. We also have ISM & PMI Services surveys tomorrow, plus the infrastructure bill and the debt ceiling debacle are still in the mix. This side of the pond in the eurozone we have August industrial output from Europe’s two biggest economies and minutes from the ECB’s last meeting, plus a full slate of ECB speakers. There is an Opec meeting today to discuss output. China will be out until Friday for Golden Week.