Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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Fixed income market: the week ahead
Althea Spinozzi
Head of Fixed Income Strategy
Summary: The reaction of US Treasury yields to Friday's jobs numbers confirms that inflation is more important than jobs for the bond market. That's why this week's focus will be on the Beige Book, as it could give better insight on whether inflation is transitory or not. Yet, we expect volatility to remain contained until the Federal Reserve gives clear indications about tapering. In Europe, the market expects a dovish tapering from the ECB. Although it will be a premature move, the trend of European sovereign yields to rise is unavoidable, with 10-year Bund yields soaring into positive territory by year-end.
The bond market sent a strong message last Friday: inflation is more important than jobs. Indeed, although headline nonfarm payrolls surprised sharply to the downside, 10-year yields rose roughly four basis points, closing near their 200-day moving average at 1.33%. A sharp rise in wages drove yields higher. Average hourly earnings rose by a whopping 0.6% in August, adding to a sequence of strong wage data since April, putting at risk the “transitory” inflation narrative of the Federal Reserve.
However, the yield move was still within 10-year yields’ monthly standard deviation, suggesting that the market remains dependent on the Fed's tapering plan before the yield curve steepens sharply. Indeed, the central bank continues to focus on jobs to reach pre-pandemic employment levels before withdrawing support. Thus the market expects tapering not to be announced at this month’s FOMC meeting and postponed later this year.
It's is bad news for the Bond market because it leaves bonds vulnerable to inflation numbers, US Treasury supply and more aggressive tapering.
This week’s focus will be the sale of 3-, 10- and 30-year US Treasuries. It will be critical to monitor indirect bidders participation, which is a key support to bonds' valuations. Because US Treasuries still offer a compelling yield compared to peers, we expect demand to continue to be solid. Yet, we might see a shift of investors preference from longer maturity to shorter as soon a bear-steepener will resume amid a Fed's tapering.
The Beige Book might also add to the vulnerability of US Treasuries this week as the market will want to gain a better insight concerning supply chain issues and labor market trends, which contributed to higher inflation this year. Any element that will point to more persistent inflation could spark a selloff in bonds. Yet, volatility will continue to be contained until Powell will not deliver on tapering.
A dovish ECB Taper?
The European Central Bank will need to upgrade its economic outlook for this year due to the solid second quarter. Yet, it's to be seen whether growth and inflation will be changed for 2022 and 2023.
As Eurozone inflation rose to a ten-year high, hawkish members of the ECB began to talk about tapering last week. Several investment banks now forecast a “dovish taper” at this week ECB meeting, referring to a decrease in purchases under the PEPP program, which is due to finish in two quarters anyway.
We believe that the central bank will be prudent not to rush in such a decision amid a wave of primary market activity hitting the bond market. An ECB tapering this week, as small as it could be, is likely to increase rates volatility. Despite financing conditions remain accommodative compared to June, it’s clear from last week’s selloff that rates remain vulnerable to even the slightest prospect of a taper. It makes it tricky for the central bank to deliver a dovish taper without affecting financing conditions.
It's undeniable that the PEPP program is supposed to end in two quarters and that guidance regarding how the central bank will decide to exit might be in the cards for Thursday. Therefore, communication surrounding changes of the APP program remains key as it could create a buffer against reduced purchases under PEPP, keeping rates in check.
Regardless of what will be announced by the ECB this week, investors need to prepare for positive Bund yields. Discussions surrounding the PEPP program will inevitably be bearish for the European bond market. Additionally, the German election looks likely to bring more fiscal spending, weighting on Bunds further.
Economic Calendar
Monday, September the 6th
- United States: Labor Day
- Canada: Labor Day
- Germany: Factory Orders, IHS Markit Construction PMI
- United Kingdom: Construction PMI, BRC Retail Sales Monitor
- Europe: Sentix Investor Confidence
Tuesday, September the 7th
- Japan: Household Spending, Overall wage income of employees, Overtime Pay, Foreign Reserves, Leading Index
- Australia: RBA Interest Rate Decision
- Switzerland: Unemployment Rate
- United Kingdom: Halifax House Price Index
- Germany: Industrial Production, ZEW Current Conditions, ZEW Economic Sentiment
- Eurozone: GDP Growth rate, ZEW Economic Sentiment Index
- United States: 3- and 6-month Bill Auction, 3-year Notes Auction
Wednesday, September the 8th
- Japan: GDP Growth, Bank Lending
- France: Balance of Trade
- Italy: Retail Sales
- Germany: 10-year Bund Auction
- United States: MBA Mortgage Applications, US Federal Reserve’s Beige Book, Consumer Credit Change, 10-year Note Auction
Thursday, September the 9th
- Japan: Foreign Bond Investment
- Germany: Balance of Trade
- Eurozone: ECB Interest Rate Decision and Press Conference, Deposit Facility Rate, Marginal Lending Rate
- United States: Continuing Jobless Claims, Initial Jobless Claims, Jobless Claims 4-week Average, 4- and 8-week Bill Auction, Fed’s Bowman and Williams Speech, 30-year Bond Auction
Friday, September the 10th
- Eurozone: Eurogroup Meeting
- Australia: Consumer Inflation expectation
- Germany: Inflation Rate
- United Kingdom: Gross Domestic Product, Balance of Trade, Industrial Production, Manufacturing production
- France: Industrial Production
- Spain: Industrial Production
- Italy: Industrial Production
- Russia: Interest Rate Decision and Press Conference, GDP Growth Rate
- Canada: Employment Change, Unemployment Rate
- United States: Producer Price Index (PPI), Wholesales inventories
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