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The highlight in Europe this week is Thursday’s ECB policy meeting, with nobody expecting policymakers in the EA and elsewhere to cling so dogmatically to the previous narrative of inflation as only a transitory phenomenon. The focus now is on what blueprint the ECB may have as an exit strategy on existing pandemic-based policies of extreme accommodation, and the extent to which that blueprint is shared with the market. It is perhaps noteworthy that known inflation and policy hawk Jens Weidmann resigned last week as Bundesbank President while announcing his departure from the ECB. In actuality, we have Central Bank policy meetings out of Canada one Wednesday, and the US, UK and Australia next week. In US Congressional politics, it looks more and more like we get a deal on reconciliation, albeit significantly downsized in both size and scope relative to previous demands by the progressive wing. That said, the real test for financial markets emanating out of Washington comes in December with the expiry of the debt ceiling extension.

German government yields moved marginally lower across the curve this past week. 10-year benchmark Bund yields came off -2 bps over this time to current levels near -.13%. The decline was completely attributable to a decline in real yields, with a +13 basis point surge in inflation breakevens almost completely offsetting the falloff in reals, as per inflation-linker market pricing. Over the past 3 months, breakevens are up roughly +58 basis points now, and +94 basis points on a year-to-date basis. Real yields in contrast have moved inside the -2.00% level as part of the market buildup in stagflationary expectations. A move back into positive ground for nominal 10-year yields is certainly possible by year-end, but we see it mores as a 2022 scenario at this point. In credit, 10-year investment grade spreads held steady near 96 basis points, even as high yields jumped +10 bps to 278 basis points. The DAX stock market index continued to reclaim lost ground with the rally in global equities, jumping approximately +235 points over the past week to current levels near 15750. The old range of upside resistance in the 15800-16000 area again looms large not far above current levels. The EUR remains locked-in near the 1.16-1.17 level. Of note, Italian bonds benefited from a S&P credit upgrade.

The economic calendar in Europe this week began with generally disappointing German IFO sentiment numbers on Monday. The balance of the week features German GfK consumer confidence, German import prices, and EA money supply on Wednesday, German employment and EA sentiment data on Thursday, and German, French, Italian & Spanish flash Q3 GDP numbers on Friday. In addition, a number of flash inflation figures are released later in the week. Government supply features a German 7-year, shorter-dated auctions out of both Italy and the Netherlands, a 5-year UK Gilt auction, and a 30-year Italian inflation-linker on Tuesday, a 15-year German offering on Wednesday, and Italian 5s & 10s on Thursday. On top of the ECB meeting itself, we hear from numerous ECB policymakers this week.

US benchmark yields moved incrementally lower in the back end of the curve this past week, while rising in the short end. As a result, the curve flattened around a 5-year pivot point, pulling the 2-10s term spread down more than -6 bps to 118 basis points. 10-year nominal yields fell by about -2 bps to 1.62%, with a -8 basis point decline in real yields not fully offset by a +6 basis point increase in inflation breakevens, as per TIPS market pricing. Technically, upside yield support in the mid 1.60s for nominals is holding for now, but it would not surprise to see the 2021 interim highs near 1.75% challenged before the year is out. On the credit front, 10-year investment grade (IG) spreads held steady near 142 basis points, with persistent upside resistance just above in the mid 140s. No major break to the upside is expected any time soon, given that eventual tapering is already pretty much priced into the market.

The US economic calendar this week features new home sales and Conference Board Consumer Confidence on Tuesday, the trade balance and durable goods on Wednesday, Q3 GDP and pending home sales on Thursday, and the employment cost index, personal income & spending, including the its key PCE deflator numbers as the Fed’s primary inflation gauge, and Michigan Sentiment on Friday. On the Treasury supply front this week, we have $60 billion in 2s for sale on Tuesday, $61 billion in 5s and $28 billion in 2-year FRNs on Wednesday, and $62 billion in 7s on Thursday. The Fed has moved into blackout in front of the Oct 1-2 FOMC, and so no speakers are scheduled this week.