Fixed income market: the week ahead

Thus, if CPI numbers surprise on the upside, it's safe to assume that 10-year yields will not rise more than their monthly standard deviation since the beginning of the year of roughly 5bps. Only twice this year, 10-year yields rose 10bps or more over a day in February amid the reflation trade. It suggests that bond bears still need a tapering announcement and interest rate hike expectations advancing to match the volatility earlier in the year.

A strong CPI report might lead 10-year yields to break above their 200 days simple moving average, pushing yields close to 1.40%. However, a fall in retail sales on Thursday might reverse their rise. Thus, Treasury yields might change little from current levels ahead of next week's FOMC meeting. Looking at the US yield curve, we expect it to bear-flatten amid a high CPI print, although the Fed has anchored rates hikes expectations.

We remain of the opinion that inflationary pressures justify an early Fed taper. The later a tapering decision is taken, the swifter a taper needs to be, and interest rate hikes to occur earlier, provoking a much deeper selloff in the bond market.  Indeed, five-year and ten-year breakeven rates broke above their 100 simple days moving averages last week in a sign that supply-chain issues, rising labor costs, and corporates' ability to pass on inflation to their customers are causes of more persistent inflation.

European market: heavy supply might bring a steeper yield curve.

We expect the European government bond space to remain calm until the German election or US yields resume their rise. The ECB delivered a dovish taper successfully, providing ample support to bond supply and carry trades during the mid-term.

However, yield curves could steepen slightly this week as bond supply is expected to surpass EUR 30 billion. Italy starts off selling 3-, 7-, and 30-year bonds through an auction tomorrow. On Thursday, Spain will sell 3-, 5- and 10-year bonds. Finally, the European Union sent an RfP last week informing that it will hold three more syndicated transactions in September, October and November to raise money under the NextGenEU fund.

Gilts will be vulnerable amid UK inflation reading.

The UK will be more in the spotlight than Europe this week. Inflation is expected to hit a three-year high at 2.9% in the UK, paving the way to a hawkish Bank of England's monetary policy meeting next week. The MPC looks split regarding whether economic conditions for a hike have been met. Thus, strong inflation numbers might be crucial to a decision next week. After 10-year yields quadrupled at the beginning of the year, they began to fall amid a wave of Delta variant. As the economy reopens and inflation runs hot, we can expect yields to resume their rise towards 0.90%.

Economic Calendar:

Monday, the 13^th of September

• Japan: BSI Large Manufacturing QoQ, Producer Price Index
• Australia: Consumer Inflation Expectations
• China: Foreign Direct Investment
• Germany: Wholesales Prices
• United States: Consumer Inflation Expectations. 3-months and 6-months Bill Auction. Monthly Budget Statement

Tuesday, the 14^th of September

• Australia: House Prices, NAB Business Confidence
• Japan: Industrial Production, Industrial Production, Capacity Utilization
• United Kingdom: Employment Change, Average Earnings, Claimant Count Change, Unemployment rate
• Spain: Harmonized Inflation Rate
• France: IEA Oil Market Report
• Germany: 2-year Schatz Auction
• Italy: 3-year, 7-year and 30-year BTPS Auction
• United Kingdom: 5-year Treasury Gilt Auction
• United States: Inflation rate

Wednesday, the 15^th of September

• New Zealand: Westpac Consumer Confidence, Current Account
• Japan: Reuters Tankan Index, Machinery orders
• Australia: Westpac Consumer Confidence index
• China: House Price Index, Fixed Asset Investment, Industrial Production, NBS Press Conference, Retail Sales, Unemployment Rate
• United Kingdom: Inflation Rate, PPI Input and Output, Retail Price Index, 10-year Gilt Auction
• France: Inflation Rate
• Italy: Inflation Rate
• Eurozone: Industrial Production, Labour Cost Index, Wage Growth
• United States: MBA Mortgage Applications, Export Prices, NY Empire State Manufacturing, Industrial Production, Capacity Utilization, Manufacturing Production
• Canada: Inflation Rate

Thursday, the 16^th of September

• New Zealand: GDP Growth Rate, Balance of Trade, Foreign Bond Investment
• Japan: Balance of Trade, Foreign Bond Investment
• Australia: Employment Change, Unemployment Rate, Full Time Employment Change
• Eurozone: Balance of Trade
• Italy: Balance Trade
• Spain: 5-year and 10-year Bond Auction
• United States: Retail Sales, Jobless Claims, Philadelphia Fed Manufacturing Index, Business Inventories
• Canada: 30-year Bond Auction

Friday, the 17^th of September

• United Kingdom: Retail sales
• Eurozone: Inflation Rate
• Italy: Current Account
• United States: Michigan Consumer Sentiment and Inflation Expectations