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The focus this week is on the Fed’s FOMC meeting, the BOE, and to a lesser extent Australia’s RBA. The Fed meeting, which is not accompanied by a fresh set of SEP economic and rate projections, should provide at least some guidance on coming bond purchase tapering, in terms of timing and process. On Monday night, the RBA pulled forward likely rate hikes from 2024 back into 2023, while still maintaining an overall message of patience on policy. Last week, the ECB acknowledged stronger not-so-transitory inflation pressures persisting to at least Q1 of next year, while at the same time pushing back against calls for rate hikes beginning next year as a counteractive measure and dismissive of STIR futures pricing of an October move. Lagarde did however point to a likely end to the ECB’s PEPP bond purchase program by March of next year. And finally, we have the BOE MPC meeting on Thursday with the jury out as to whether a first rate-hike may be pending at that time. We expect a split decision in favour of no-move at this time from the voting MPC membership. In the pecking order of inflation-fighting resolve, the ECB clearly remains the least hawkish/most dovish, with the BOE at the other end of that spectrum and the Fed somewhere in the middle.  

German government yields moved lower this past week, led by a big fall-back in inflation expectations. 10-year nominal yields fell -2 bps to -.14%, albeit with a -18 basis point drop in inflation breakevens close to offset by a +16 basis point increase in real yields, as per linker-market pricing. The 2-10s curve flattened a few basis points to 51 bps. We continue to expect an eventual move back into positive ground for German 10 year-nominals, but see it more as a 2022 scenario at this point. In credit, 10-year investment grade spreads inched out to 97 basis points, while high yields widened by a full +33 bps, moving back above the 300 basis point level. The DAX stock market index is back near 15870, fighting old strong upside resistance in the 15800-160000 area, on a global equities market rally-driven +115 point week-over-week increase.  

The economic calendar in Europe this week began with very disappointed German retail sales numbers on Monday. The balance of the week features German factory orders on Thursday, German industrial production on Friday, and a scatterplot of individual country retail sales and PMI revisions. Government supply features a German 5-year BOBL on Wednesday, and French 10s and Spanish 7s, 10s & 25s on Thursday. We hear from several ECB policymakers this week, including ECB President Lagarde on Wednesday, who the German press has now nicknamed “Madame Inflation”.

US benchmark yields moved modestly lower this past week, led by the long end of the curve, with the market as a whole consolidating after recent losses. 30-year Treasury yields fell -7 basis points over this time, while 10s came off -6 bps to 1.55%. 2-year yields bucked the trend, rising another +3 basis points on rising rate hike fears. 10-year inflation breakevens fell approximately -9 bps over the past week, partially offset by a +3 basis point increase in real yields, as per TIPS market pricing. Over the past 4 weeks, 2s are up roughly +19 basis points against a +3 basis point increase in 10s, dropping the 2-10s curve to 108 basis points. Technically, a nice wall of technical upside yield support for 10-year nominal yields looms large in the mid 1.60s. This however is expected to be cleared out in due course, and the 2021 interim highs of 1.75% at least challenged before the year is out. In credit, 10-year investment grade spreads inched out to 144 bps, as upside resistance in the mid 140s continues to hold. No material break to the upside is expected any time soon, given that eventual tapering is already pretty much priced into the market.

The highlight to this week’s economic calendar in the US is Friday’s Nonfarm Payrolls report, complete with data on job creation, the unemployment rate, hours worked, and wages. The market is looking for +400K on the headline, up from the previous month’s very disappointing +194K, and a dip in the unemployment rate to 4.7% from 4.8%. The week was kick-started with Monday’s manufacturing ISM release, with the headline number dipping from the previous month, and falling a little shy of consensus expectations. On Wednesday, we get ADP employment as a lead-in to Nonfarms, as well as ISM-services PMI, Markit services & composite PMIs, and Factory Orders. The trade balance and Q3 productivity follow on Thursday. On the government supply front, nothing is scheduled this week, but on Wednesday we do get the Refunding announcement for the following week’s line-up of 3s, 10s, and 30s.