Markets

Investors yesterday had all the time in the world to assess today’s Fed meeting and US data earlier this month (ADLabour report, non-manufacturing ISM and payroll) given the empty green calendar. Such a setup primarily suggests technical trading. The American yield curve Taurus steepened with a 2-year rate down 4.9 bps and the 30-year rate up 0.1 bp, but the period between the end of tapering and the take-off of rate hikes remains a source of debate. The repositioning in EMU yield markets has been more impressive. The German 10-year and 10-year swap rates recently intensively tested post-corona highs at -0.07% and 0.30% / 0.32% respectively. The ST dynamics between real returns and inflation expectations have often shown sharp, even erratic, fluctuations. An upward breakout did not take place with the ECB still in wait-and-see mode. German rates fell from 5.7 bps (2 years) to 7.4 bps (5 years), the very long being once again the exception (+0.6 bps). Both inflation expectations and real returns have eased, with the former taking the lead. The Germany / EMU swap yields last week easily resumed a steep uptrend channel after a first setback. It probably won’t be that easy after yesterday’s drop. The correction in core yields also release of pressure on peripheral markets with a narrowing of the Italian spread of 8 bps. Movements in stocks and currencies were again much smaller. US stocks extended their journey into record territory even as gains were modest (0.3% -0.4%). European indices traded mixed near the highs of recent cycles. After a soft start, the dollar gained ground despite the risk. USD / JPY closed little change (113.96). EUR / USD failed to hold north of the 1.16 handle (close at 1.1579). The pound sterling remains in correction mode (EUR / GBP close at 0.8506).

The calendar contains the US ADP employment report (expected job growth at 400k) and the US non-manufacturing ISM (expected stable near 62). Both series provide valuable insight into how the US economy navigates through the complex of supply distortions and persistent price increases. An unconstrained reaction is still unlikely before the Fed. The Fed’s reduction in bond purchases of 15 billion / m with a close of net purchases in the middle of next year is discounted. The focus will be on the inflation story and the “link” between the end of tapering and the first rate hike. The Fed’s statement simply said in September: “Inflation is high, largely reflecting transient factors.” The Fed considering the risk of more lasting inflation could support the case of a rate hike soon enough after bond buying ends. This should ease inflation expectations, support real yields and the dollar. Fed Powell could nevertheless express himself in conditional terms at the press conference. Even in such a scenario, the US 10-year rate should remain above 1.5%. In Europe, we are looking at how far the rate correction goes. 0.17% / 18% is the first benchmark for the EMU 10-year swap. The Fed putting more weight on inflation should be positive for the USD. EUR / USD support at 1.1495 is essential. We are also closely following the decision of the National Bank of Poland. We suspect that the market / PLN could be disappointed if the NBP increases by less than 50bp.

News headlines

New Zealand employment increased 2% q / q in the prior quarter, crushing estimates by 0.4% and building on strong Q2 gains of 1.1%. The increase is due exclusively to full time jobs (+ 2.3% t / t). Hours worked fell (-6.6%) due to the bottlenecks that still affected the economy in the third quarter. The Unemployment rate hits new pandemic low at 3.4%, just below the series’ record low of 3.3% (2007) even though the turnout equaled the previous record of several decades (71.2%). With the CPI soaring last month (4.9% yoy), RBNZ almost certain to raise policy rates back to back at November 24 meeting. Despite the stellar jobs report, the Kiwi dollar fell short of the strong greenback. The NZD / USD slipped from 0.718 to 0.7111.

The United States has again stepped up pressure on OPEC + to normalize production faster than 400,000 barrels per day should be announced at tomorrow’s meeting. President Biden accused OPEC’s strategy of fueling inflation while Secretary of State Blinken held talks with the UAE’s foreign minister on Tuesday to push for increased production . Their comments created speculation that the United States could release strategic reserves if OPEC fails to increase production. Oil prices are dropping today, with Brent losing about 1% to $ 83.86 / barrel.

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