US debt ceiling
As the Federal Reserve debates on when to pull stimulus from the economy, another topic should be on investors' radar: debt ceiling talks. Yellen recently renewed calls to raise the debt limit to avoid a default of the US Treasury as soon as next month. The debt ceiling is critical because the later a decision to extend it arrives, the more Bills the Treasury will need to issue in a short timeframe resulting in a quantitative tightening. We exclude the possibility that the US Treasury will default. Still, we are monitoring discussion keeping in mind that the later a decision is reached, the bigger the chance for higher volatility. Although demand in the money market remains strong, with the RRP facility hitting new record highs almost weekly, if the US Treasury needs to issue $500bn of securities in a very short timeframe, it will catch the market by surprise. Volatility could even rise further if the Fed begins to taper in the meanwhile.
Thursday: Bank of England
Discussions regarding pulling support from the economy are heating up. Last week’s inflation numbers showed that the CPI reached a ten year high of 3.2%, and central bankers expect it to rise further to 4% during the last part of the year or the beginning of 2022. In the meantime, the job market is recovering quickly, although retail sales continue to disappoint. During the last meeting, the BOE gave some instructions regarding a possible wind-down of its balance sheet. The central bank will start reducing its bond portfolio by not investing proceeds when rates reach 0.5%. It will also engage in actively selling off bonds only when rates hit 1%. Although such targets make the winding down of the balance sheet probable in a couple of years, a tapering announcement might be approaching. During the last meeting, most of the MPC voted in favor of decreasing bond purchases, with Saunders being the only one opposing it.
Credit spreads will be vulnerable to Evergrande and natural gas story
This week will also be a crucial week for credit spreads. Evergrande is not expected to pay interest on existing debt on Thursday, resulting in the second-largest Chinese property developer's default. Although we do not expect contagion outside the Chinese market, it's impossible not to recognize that such a default will undermine China's economic activity, weighing on the world's economy. Consequently, we might see a flight to safety surrounding the Evergrande story, not only in China but also abroad.
Yet, we expect the natural gas story to be a much more significant driver of credit spreads in Europe in the upcoming months than the Evergrande story. In the UK, we are seeing the sixth-largest energy provider, Bulb, in search of a bailout. At the same time, four other energy companies are at risk of default. It's just the beginning of a cold winter where gas shortages are likely, and businesses could be forced to shut. It can have serious implications for the economy and the political sphere as it would add to the pandemic shock.
Economic calendar
Monday, the 20th of September
- Germany: Producer Price Index
- Spain: Balance of Trade
- United States: NAHB Housing Market Index, 3-months and 6-months Bill Auction, UN General Assembly
Tuesday, the 21st of September
- Australia: RBA Meeting Minutes
- United Kingdom: Public Sector Net Borrowing, CBO Industrial Trends Orders
- United States: Current Account, Housing Starts, Building Permits, Housing Starts, Building Permits, Redbook
Wednesday, the 22nd of September
- Australia: Westpac Leading Index
- Japan: BoJ Interest Rate Decision
- Netherlands: Consumer Confidence
- Eurozone: ECB Non-Monetary Policy Meeting, Consumer Confidence
- Italy: Industrial Sales
- United States: MBA Mortgage Applications, 2-year Floater Auction, FOMC Economic Projections, Fed Interest Rate Decision, Fed Press Conference
Thursday, the 23rd of September
- Australia: Markit manufacturing PMI, Markit Services PMI
- Japan: Foreign Bond Investment
- Netherlands: GDP Growth Rate
- France: Business Confidence, Markit Composite, Manufacturing and Services PMI
- Spain: GDP Growth Rate
- Germany: Markit Composite, Manufacturing and Services PMI
- Eurozone: ECB General Council Meeting, Markit Composite, Manufacturing and Services PMI
- United Kingdom: Markit/CIPS Composite, Manufacturing and Services PMI, BOE Interest Rate Decisions, Quantitative Easing, MPC Meeting Minutes
- Canada: Retail Sales
- United States: Chicago Fed National Activity Index, Continuing Jobless Claims, Initial Jobless Claims, Markit Manufacturing PMI, 4-week and 8-week Auction, 10-year TIPS Auction
Friday, the 24th of September
- New Zealand: Balance of Trade
- United Kingdom: GfK Consumer Confidence, Inflation Rate, BoE Tenreyro Speech
- Germany: Ifo Business Climate
- Italy: Business Confidence
- United States: New Home Sales