Although the Federal Reserve has tried to decouple tapering from interest rate hikes expectations, it failed to do so. That's why as the market expects a faster pace of tapering, short-term yields will soar. On the other end, the long part of the yield curve is dropping as the market anticipates slower growth, caused partly by covid and partly by interest rate hikes expectations. However, it might still change in light of this morning's cut of the reserve requirement ratio in China. The news report that China will keep liquidity at an ample level to support small and medium enterprises. It signs the beginning of a monetary easing cycle to counter the economic slowdown, which could benefit growth globally.
Therefore, the long part of the yield curve looks too rich and depends on growth estimations and the omicron variant. Those variables are crucial to keeping yields at current low levels. However, as we approach the end of tapering, the Federal Reserve will begin to discuss interest rate hikes, putting upward pressure on the whole yield curve, including long-term yields. Therefore, it is safe to expect a yield curve flattening during the next couple of months, accentuated by low long-term yields. Yet, as we approach interest rate hikes, long-term yields will also need to move higher towards our 2% target.
Demand for US Treasuries continues to be critical. Hence this week 3-year, 10-year, and 30-year US Treasury auction will be in the spotlight.
Gilts: are interest rate hikes in the UK ahead of themselves?
The focus will be on the October GDP figures released on Friday. UK growth is expected to soften in October to 0.4% compared to the jump of 0.6% in September. Yet, the biggest challenge the market will be facing concerns rate hikes expectations. Indeed, the market has been pricing four rate hikes next year, which is a much more aggressive rate hike cycle compared to other developed economies. A 10bps rate hike is estimated to be delivered already at the next BOE meeting. However, Michael Saunders on Friday said that he would need to think twice about voting for a rate hike this month. These comments come from the most hawkish member on the MPC, putting in doubt that a rate hike is on the card at all. If a rate hike is not delivered, the market might need to reconsider rate hikes expectations for 2022, provoking yields in the front part of the yield curve to drop.
Monday, December the 6th
- Italy: Retail Sales (Oct)
- United Kingdom: Construction PMI (Nov), BoE Broadbent Speech
Tuesday, December the 7th
- Australia: Ai Group Services Index (Nov), Building Permits MoM Final (Oct), RBA Interest rate Decision
- Japan: Household Spending YoY (Oct), 30-year JGB Auction, Coincidence Index Prel (Oct)
- United Kingdom: BRC Retail Sales Monitor YoY (Nov), 30-year Treasury Gilt Auction
- China: Balance of Trade (Nov)
- Netherlands: Inflation Rate (Nov)
- France: Balance of Trade (Oct)
- South Africa: GDP Growth Rate (Q3)
- Eurozone: GDP Growth Rate 3rd Estimate (Q3), ZWE Economic Sentiment Index (Dec)
- Germany: ZEW Economic Sentiment Index (Dec), 2-year Schatz Auction
- Spain: Consumer Confidence
- Canada: Balance of Trade (Oct), Ivey PMI s.a.
- United States: Balance of Trade (Oct), Consumer Credit Change, 3-year Note auction
Wednesday, December the 8th
- Japan: GDP Growth Annualized Final (Q3), Bank Lending YoY (Nov), GDP Growth Rate QoQ Final (Q3), Eco Watchers Survey Outlook (Nov)
- Germany: 10-Year Bund Auction
- United States: MBA Mortgage Application, MBA 30-year Mortgage Rate, MBA Mortgage Market Index, MBA Mortgage Refinance Index, JOLTs Jon Openings (Oct), JOBs Job Quit (Oct), 10-year Bond Auction
- Canada: BoC Interest Rate Decision
Thursday, December the 9th
- Australia: RBA Gov Lowe Speech, RBA Bulleting
- Japan: BSI Large Manufacturing QoQ (Q4), Foreign Bond Investment
- China: Inflation Rate YoY (Nov), PPI YoY (Nov)
- Germany: Balance of Trade (Oct)
- Ireland: Harmonized Inflation Rate (Nov)
- United States: Continuing Jobless Claims, Initial Jobless Claims, Jobless Claims 4-week Average. Wholesale Inventories MoM (Oct), 30-year Bond Auction
Friday, December the 10th
- New Zealand: Business NZ PMI (Nov), Electronic Retail Card Spending (Nov)
- Japan: PPI (Nov)
- Germany: Inflation Rate Final (Nov)
- United Kingdom: GDP (Oct), Balance of Trade, Construction Output (Oct), Goods Trade Balance (Oct), Industrial Production (Oct), Manufacturing Production (Oct), NIESR Monthly GDP tracker (Nov)
- Italy: Industrial Production (Oct)
- United States: Inflation Rate (Nov), Michigan Consumer Sentiment Prel (Dec), Michigan 5-year Inflation Expectations Prel (Dec), Michigan Current Conditions Prel (Dec), Michigan Inflation expectations Prel (Dec), Monthly Budget Statement