Hawkish Central Banks Amid Evergrande Concerns Allied
Market players today
Heavy central bank week continues today with political announcements Fof Banque Norges and the Bank of England. We expect Norges Bank to hike its policy rate by 25bp to 0.25% and say it will “very likely” rise again in December. Furthermore, developments since June suggest that the path for rates in the new Monetary Policy Report will be slightly steeper than that in June and signals a c. 50/50% probability of 3 or 4 hikes next year.
This is one of the Bank of England (BoE) interim meetings, so we don’t expect any major changes in policy signals. That said, there is growing speculation that the BoE could become more hawkish, as inflation is high and payroll employment is now higher than before COVID (although total employment is not. or not). We do not expect anything new from the Swiss National Bank.
Moreover Preliminary PMI for the euro zone, the United Kingdom and the United States are expected today. We expect PMIs to confirm that we are past the peak in manufacturing, but bottlenecks remain.
Unemployment claims in the United States are interesting, because the temporarily higher unemployment benefits expired in early September.
Finally, the markets will continue to monitor the Evergrande situation closely.
The 60-second preview
Evergrande: Concerns over the collapse of Evergrande have eased following tentative signs that an orderly restructuring could take place. Chinese stocks rose about 1% in Hong Kong overnight. We are still awaiting news on the $ 83.5 million interest payments on a dollar bond. Yesterday, Evergrande announced that an agreement has been reached with domestic bondholders on a separate payment due today. Markets also got backing from a report yesterday that said Beijing is working on a plan to take over the company and split it into three, which also raised hopes that the crisis could be resolved soon. The report has not been confirmed, however, so it’s not clear if there is any truth to this. Our baseline was that it would get worse before it got better. But the situation is very fluid and it is also possible that the government feels it needs to intervene quickly to avoid too much damage to an economy that is already struggling with the delay of demand drivers after new outbreaks of Covid have taken hold. turns off the fuel engine.
The Fed: Yesterday, the Fed announced that tapering “may soon be justified” and that it expects tapering to be concluded in mid-2022. The dot plot has been raised, signaling a total of 6.5 rate hikes by the end of 2024. We expect the Fed to announce a cut at the next meeting in November and that the rate of reduction will be approximately $ 20 billion per month, which implies that the reduction is complete. by mid-2022. We are still waiting for the first rate hike in H2 2022, either September or December, see also Fed Research – Review: The Fed is about to enter a tightening cycle.
Actions: Markets were too busy rebounding, ignoring the FOMC decision. The United States struggled somewhat to find its direction in the last hour of trading, but judging from the initial reaction, the Fed’s hawkish tilt was welcomed. Risk is also evident in the relative performance of the sector, with value and cyclicals being the watchword. Energy, banking and technology were among the industry favorites. Meanwhile, health care and utilities lagged behind. S & P500, Dow and Nasdaq up 1% and Russell 2000 up a solid 1.5%. VIX down for a second day, and now slightly south of 25. Optimism continues in Asia this morning with markets up around 1%. US futures all in green.
FI: German 10-year yields were slightly lower yesterday, with semi-core and peripheral yields posting a larger drop in yields as 10-year Italy was down 3bp. The news that the Fed’s tapering could begin soon resulted in a slight flattening of the US yield curve, with 2-year rates rising while 10-year rates falling.
FX: EUR / USD fell below 1.17 yesterday after the more hawkish-than-expected message from the Fed. EUR / NOK and EUR / SEK ended the day virtually unchanged from just before the Fed’s announcement. Today’s key events in the FX space are the Norges Bank and Bank of England meetings.
Credit: Credit had a good run yesterday where iTraxx Xover tightened by 6bp and Main by 1.3bp. HY bonds tightened by 1bp while IG bonds widened slightly.
We are waiting Norges Bank to raise its key rate from zero to 0.25% and to say that it will “very likely” increase again in December. Furthermore, developments since June suggest that the path for rates in the new Monetary Policy Report will be slightly steeper than that in June and signals a c. 50/50% probability of 3 or 4 hikes next year.