The biggest drivers in global markets right now are US politics and the surge in global energy prices. Against this backdrop, both bond yields and stock prices have come under pressure, and may very well continue to do so in the months ahead. US Congress is now working with timetables of October 18, the date on which Treasury Secretary Yellen says the US will run out of cash, on the debt ceiling, and the arbitrary deadline of October 31 on the bipartisan infrastructure and reconciliation bills. Meanwhile, oil prices now flirting with the $80 level, with many expecting a move north of $100 in the months ahead, is stoking inflationary and stagflationary fears. And soaring natural gas prices have yet to hit the pocket book of consumers with the winter months ahead. Overnight, Australia’s RBA held policy rates at record lows, saying that inflation was yet strong enough to validate a move higher in rates.
German government yields moved marginally lower on a week-over-week basis, as the global rates moved into consolidation on the heels of the late September selloff. 10-year Bund yields fell back a couple of basis points to -.22%, led by declines in real yields. As per inflation-linker market pricing, 10-year real yields fell about -4 bps against a +2 basis point increase in breakevens. Technically, the next meaningful level of upside resistance remains near the -.15% level in defense of the 2021 highs of -.08%. In credit, IG spreads held steady near 92 bps, holding the prevailing range. The DAX equity market fell back further on the week, moving back inside the 15100 level for the first time since early May. The EUR held steady near the one-year lows of 1.16.
The economic calendar in Europe is on the light side this week, with only German factory orders on Wednesday, German Industrial production on Thursday, German trade on Friday, and a handful of individual country PMI final revisions. Government supply sees a 5-year BOBL auction out of Germany on Wednesday, followed by French 5s, and Spanish 5s & 10s on Thursday. From the ECB, we hear from Lagarde on Tuesday, and both Schnabel and Lane on Thursday, with the Bundesbank’s Wuermeling and Balz also scheduled to speak this week.
US benchmark yields pulled back this past week, taking back some of recent market losses. 10-year yields fell roughly -6 bps to 1.49% on the week, with the decrease pretty evenly split between declines in real yields and breakevens, as per TIPs market pricing. Technically, upside yield support in the mid to high 1.50s held on the post FOMC advance, and while a scenario of resumed near to medium term selling is probably more likely than not, we do not see a move north of the 2.00% level until sometime in 2022. On the credit front, 10-year investment grade (IG) spreads inched their way back above the 140 basis point level, holding the high 130s to high 140s range in place since roughly the 24th of June.
The economic calendar in the US this week is highlighted by Friday’s nonfarm payrolls report for September, with the market looking for +488K on the headline, up from the previous month’s +235K, and a dip in the unemployment rate to 5.1% from 5.2% in August. Average hourly earnings jumped to +.6% m/m in August, but this is expected to settle back to +.4% m/m in September. In advance of payrolls, we have the trade balance, ISM services, and Market services & composite PMIs on Tuesday, ADP employment on Wednesday, and Consumer Credit on Thursday. No government supply is scheduled this week, but on Thursday we do get the announcement for next week’s lineup of 3s, 10s & 30s. From the Fed, we hear only from Atlanta Fed President Bostic on Wednesday, and non-voter Mester on Thursday.