The surge in energy prices, crude oil and natural gas in particular, remains a dominant driver of global markets at the moment. Government yield curves in both the US and Germany continue to steepen on rising energy cost and inflation fears, even as short yields, particularly in Treasuries, begin to pull up anchor with the evolving shift in rate hike expectations. China’s Evergrande missed another round of coupon payments, reinforcing Chinese property market concerns, and providing at least some offsetting safe-haven buying support on the usual contagion fears. In terms of US politics, the can has been kicked down the road on the debt ceiling, taking what had become a major risk factor earlier this month at least temporarily out of play. That said, wrangling over the infrastructure and reconciliation bills will keep markets on their toes in the weeks ahead. Even with the caveat of private sector job creation being in actuality fairly robust, Friday’s US jobs numbers for September were seen disappointing once again.
German government yields increased this past week at a somewhat more subdued pace relative to that seen in US Treasuries. 10-year Bund yields rose roughly +9 basis points over this time to -.13%, led by +6 basis point increase in real yields to -1.80%, as per inflation linker market pricing. Over the past 4 weeks, real yields and inflation breakevens are both up by about +10 bps, pushing nominals higher by a full +20 basis points. Technically, the next obvious level of upside market support is the 2021 highs of -.08%, and beyond that at 0%, with long bond yields pushing their own ’21 highs just north of +.40%. In credit, IG spreads moved incrementally wider to 94 bps, pushing the top end of the prevailing range, while high yield spreads widened about +6 bps to 272 basis points. Of note, the EU launched its first green bond, with demand for the upsized 15-year, 12 billion euro deal very strong. The DAX equity market held it’s ground this past week, with decent support gelling in the low 15000s. Current levels sit near 15150. The EUR held steady near the one-year lows of 1.16.
In terms of the economic calendar in Europe this week, German ZEW sentiment data on Tuesday fell more than -4 points to 22.3, just inside the consensus forecast. German wholesale prices came out stronger-than-expected, further stoking inflationary fears. For the remainder of the week, we get final German HICP on Wednesday, followed by similar revisions for Spain, France and Italy. The data out of the UK is heavy this week, beginning with Tuesday’s UK employment data printing on balance on the firm side of market expectations. On the heels of this, we have UK GDP, trade, and industrial & manufacturing numbers. Government supply features 2-year Schatz’s from Germany on Tuesday, and German 30s and Italian 3s, 7s, 20s & 30s on Wednesday.
US benchmark yields surged back higher this past week, as the short-term corrective rally in rates gave way to renewed selling. 10-year yields moved up by about +12 bps on the week to current levels just north of 1.60%. The increase in nominals was led by a +10 basis point jump in inflation expectations, with 10-year real yields up only a couple of basis points, as per TIPs market pricing. Technically, upside yield support in the high 1.50s has been taken out, with the next test in the mid 1.60s in defense of the 2021 highs around 1.75%. While a move beyond that to 2.00% is possible by year-end, we still see this as a more likely scenario for 2022. On the credit front, 10-year investment grade (IG) spreads moved up incrementally to 144 basis points, towards the wide end of the 3.5 month range.
The economic calendar in the US this week is highlighted by Wednesday’s key CPI report for September, with investors looking for m/m and y/y increases of +.1% and +4.0% on core respectively. Apart from CPI, we get JOLTs job openings and NFIB small business optimism on Tuesday, Atlanta Fed business inflation expectations on Wednesday, PPI on Thursday, and retail sales, import/export prices and Michigan Sentiment on Friday. On Wednesday, the FOMC minutes will be released, noting however the September policy meeting preceded yet another disappointment on nonfarm payrolls. With respect to US government supply this week, we get $58 billion in 3s and $38 billion in 10s on Tuesday, followed by a $24 billion 30-year auction on Wednesday. The following week’s lineup of 20s and 5-year TIPS is announced on Thursday as well. It is a busy week for Fedspeak, with voters Bostic, Brainard, Bowman, Barkin and Williams and non-voter Harkin all scheduled, and collectively observers will be looking for fresh insights on the timetable for tapering on the heels of the weak jobs data last Friday.