For financial markets, the week started with a blaze, as global stocks tumbled on Chinese real estate, Fed tapering, US budgetary & debt ceiling, and Covid variant jitters. The week ahead features Central Bank policy meetings out of the US, UK, Norway, Sweden, and Japan. The 2-day FOMC meeting ending with Powell’s press conference on Wednesday also presents the latest set of dot plot projections, with the market on alert for one or more Fed officials pulling in their expectations for the first rate hike on the road to normalization from 2023 into 2022. On the tapering front, the market is divided as to how explicit the Fed might be in terms of timing and overall detail even with the general consensus calling for some strengthening with respect to the need to begin gearing back sooner rather than later. How Powell and the Fed frame their discussion on inflation as either a still-transitory factor, or something more concerning will also be important. Of note, the SEP projections will also cover 2024 for the first time. The BOE meeting on Thursday does not this month include publication of a Monetary Policy Report, with only the announcement itself and minutes available for clues as to future direction. Meanwhile, Norway’s Norges Bank is widely expected to raise rates for the first time on Thursday.
Mid and longer-dated Bund yields increased marginally on the week in spite of Monday’s global flight-to-safety rally in bonds. 10s are now seen about +3 basis points higher on a week-over-week basis to -.31%, led by rising real yields, as per linker market pricing. Inflation breakevens in contrast held steady over this time. Technically, we continue to see good downside resistance at the recent 7- month double-bottom low near -.50%, against lines of upside support at -.29%, -.15%, and -.08%. In credit, IG spreads held steady near 93 bps, towards the top end of the prevailing range, while high yield spreads continued to pull back. European equities were dragged lower with Monday’s big pullback in global stocks, with the DAX index down over -350 points on the week to current levels near 15360.
The economic calendar in Europe presents EZ consumer confidence on Wednesday, a number of flash manufacturing & services PMIs over the course of the week, and German IFO sentiment readings on Friday. Monday’s PPI out of Germany came out lower on a mth-to-mth basis, but higher than consensus expectations. There is little in the way of government supply this week on the heels of the previous week’s heavy calendar. Of note, Moody’s upgraded their credit ratings on both Portugal and Greece.
US benchmark government yields moved higher on a week-over-week basis, led by the belly of the curve. Bellwether 10-year yields increased +5 basis points over this time to current levels near 1.33%. Inflation expectations eased off against the grain, with breakevens -2 basis points lower on the week against a more-than-offsetting +7 basis point increase in real yields, as per TIPS market pricing. Upside yield support in nominals is seen in the high 1.30s, with a break higher likely needing definitive signs the US and other countries have been able to rein back in the recent resurgence in Covid-19. 10-year investment grade (IG) spreads moved out a couple of basis points on the week to 144 bps, but managing to hold the 6-month range with upside resistance seen near 146 bps.
The economic calendar in the US features housing starts & building permits on Tuesday, existing home sales on Wednesday, Markit manufacturing, services & composite PMIs on Thursday, and new home sales on Friday. In terms of scheduled supply auctions this week, we get $24 billion in 20s on Tuesday, $26 billion in 2-year FRNs on Wednesday, and $14 billion in 10-year TIPS on Thursday. We also have the supply announcement for next week’s lineup of 2s, 5s, and 7s on Wednesday. The Fed’s Powell, Clarida, and Bowman all speak on Friday as a follow-up to the mid-week FOMC, as well as non-voters George and Mester.