Drivers for the Week of October 10, 2021

October 10, 2021

Win Thin

Here's a look at the main drivers in Developed Markets this week.

Markets are still digesting last Friday’s jobs report; despite the holiday Monday, this will be an action-packed week for the U.S.; September inflation readings will be closely watched; retail sales Friday will be equally important; U.S. Treasury has a heavy auction schedule; FOMC minutes will be released Wednesday; imminent default by the U.S. has been averted
Eurozone has a fairly light week; there is a full slate of ECB speakers; U.K. has its monthly data dump; there are some BOE speakers of note
Japan reports some key data this week; Australia reports September jobs data Thursday

AMERICAS

Markets are still digesting last Friday’s jobs report. The headline NFP gain of 194k was disappointing, but there were some bright spots in the data. August was revised up to 366k from 235k previously, while the two-month revisions totaled 169k. The unemployment rate fell to 4.8% vs. 5.1% expected and 5.2% in August, driven by a 526k gain in the household survey that followed a 509k gain in August. This paints a different picture than NFP, which is derived from the establishment survey. When all is said and done, we think the sharp drop in the unemployment rate coupled with 4.6% y/y gain in average hourly earnings will give the Fed confidence to pull the trigger on tapering at the November 2-3 FOMC meeting. In the past, such tapering has led to further dollar gains and we believe that dynamic will continue to play out in the coming weeks. Please see our recent piece “Tapering and the Dollar.”

Despite the holiday Monday, this will be an action-packed week for the U.S. Yields are making new highs for this move and data this week will be key in extending this move. According to the Fed Funds futures strip, odds for a Q4 22 lift-off are still at 100%, while odds for a Q3 22 lift-off have risen to just below 50%, which are still quite significant.

The U.S. curve steepening continues, which tells us that the bond market sees tapering as still on track. The 3-month to 10-year curve rose to 157 bp Friday, the highest since early June, while the 2- to 10-year curve rose to 130 bp, the highest since mid-June. The 10-year yield broke above 1.60% for the first time since June 4 and is on track to test the May high near 1.70%. After that is the March high near 1.77%. Elsewhere, the 2-year yield rose to 0.32%, the highest since March 2020. Of course, this will have implications for the dollar, which remains on a tear. The 2-year differentials with Germany (101 bp) and Japan (42 bp) are both at cycle highs and support further dollar gains vs. the euro and yen.

September inflation readings will be closely watched. CPI will be reported Wednesday, with headline expected to remain steady at 5.3% y/y and core expected to pick up a tick to 4.1% y/y. PPI will be reported Thursday, with headline expected to pick up nearly half a point to 8.7% y/y and core expected to pick up nearly half a point to 7.1% y/y. The rise in PPI will be particularly troublesome, as reports suggest firms are finding it easy to pass through higher costs to consumers, which implies upside risks for CPI in the coming months.

Retail sales Friday will be equally important. Headline sales are expected to fall -0.2% m/m vs. a 0.7% gain in August, while ex-autos are expected to rise 0.5% m/m vs. 1.8% in August. The so-called control group used for GDP calculations is expected to rise 0.4% m/m vs. 2.5% in August. In that vein, October University of Michigan consumer sentiment that same day could help determine if consumption is likely to remain strong in Q4. Headline is expected at 73.5 vs. 72.8 in September.

Within this uncertain backdrop, the U.S. Treasury has a heavy auction schedule. $58 bln of 3-year notes and $38 bln of 10-year notes will be auctioned Tuesday. At the previous auction, indirect bidders took 56.7% and 71.1% and the bid-cover ratios were 2.45 and 2.59, respectively. A $24 bln sale of 20-year bonds will be held Wednesday. At the previous auction, indirect bidders took 69.7% and the bid-cover ratio was 2.49. Will foreign buyers participate with yields on the upswing? Stay tuned.

Regional Fed manufacturing surveys for October will start rolling out. Empire survey kicks things of Friday and is expected at 25.0 vs. 34.3 in September. This is the very first snapshot for October and the U.S. manufacturing sector enters Q4 with strong momentum despite ongoing supply chain issues.

FOMC minutes will be released Wednesday. At the September meeting, the Fed delivered what we viewed as a hawkish hold. It said that tapering “may soon be warranted” as the economy and employment have continued to strengthen. Powell later said that if the economy progresses as expected, the Fed may move at the next meeting. He added that the Fed needs to see a “reasonably good” jobs report but that in his thinking, the test is “all but met.” Lastly, Powell said that gradual tapering is likely to conclude around mid-2022. The last time the Fed tapered, it was spread out over a year. Powell said it will only take 6 months.

Fed speakers are plentiful. Evans speaks Monday, followed by Clarida, Bostic, and Barkin Tuesday. Brainard and Bowman speak Wednesday, followed by Bullard, Bostic, Barkin, Daly, and Harker Thursday. Bullard and Williams close things out Friday. This large group of speakers includes both some hawks and some doves and so it will be very interesting to see how the Fed interprets Friday’s jobs report. We believe tapering remains on track.

Imminent default by the U.S. has been averted. The House is scheduled to vote on the short-term extension of the debt ceiling Tuesday and is widely expected to pass. Then comes the hard part: getting the Democrats to compromise on the “human infrastructure” bill. We think it will happen, which should then see it and long-term debt ceiling extension or suspension passed together via budget reconciliation. After that, the traditional infrastructure bill should be passed by a bipartisan vote.

Other minor data round out the week. August JOLTS jobs openings will be reported Tuesday and are expected at 10.938 mln vs. 10.934 mln in July. Initial claims data Thursday are expected to show continued improvement, with initial claims expected at 320k vs. 326k previously and continuing claims expected at 2.686 mln vs. 2.714 mln previously. September import/export prices will be reported Friday, along with August business inventories (0.6% m/m expected).

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a fairly light week. Italy reports August IP Monday and is expected to fall -0.2% m/m vs. a 0.8% gain in July. Germany reports September WPI and October ZEW survey Tuesday. Eurozone IP will be reported Wednesday and is expected to fall -1.6% m/m vs. a 1.5% gain in July. Eurozone September new car registrations and August trade will be reported Friday. Overall, recent eurozone data have come in soft and should give the ECB doves cover to push back against the hawks, who want to end accommodation.

There is a full slate of ECB speakers. Villeroy, Centeno, Elderson, Lane, Holzmann, Elderson, and De Cos all speak Monday. Knot, Villeroy, Lane, and Elderson speak Tuesday. Visco speaks Wednesday. Elderson speaks Thursday, followed by Lagarde Saturday. Next policy meeting October 28 is likely to be contentious and so no decision on QE is expected until the December meeting.

U.K. has its monthly data dump. Labor market data will be reported Tuesday, with unemployment expected to fall a tick to 4.5% and employment expected to rise 250k for the three months ending August. Wednesday sees August IP, construction output, services, trade, and GDP. IP is expected to rise 0.2% m/m vs. 1.2% in July, construction is expected to rise 0.5% m/m vs. -1.6% in July, services is expected to rise 0.6% m/m vs. flat in July, and GDP is expected to rise 0.5% m/m vs. 0.1% in July. The trade deficit is expected at -GBP2.8 bln vs. -GBP3.1 bln in July.

There are some BOE speakers of note. Cunliffe speaks Wednesday. Tenreyo and Mann speak Thursday. The short sterling strip has nearly fully priced in lift-off in Q4, with another 2-3 hikes priced in over the course of 2022. This strikes us as overly hawkish and this makes sterling vulnerable to some readjustment in BOE views in the coming days.

ASIA

Japan reports some key data this week. September machine tool orders will be reported Monday. PPI will be reported Tuesday and is expected to rise 5.8% y/y vs. 5.5% in August. August core machine orders will be reported Wednesday and are expected to rise 1.5% m/m vs. 0.9% in July. Final August IP will be reported Thursday. Q3 may not have been as weak as anticipated, while the Q4 is looking better with the end of the state of emergency and another fiscal package expected soon.

Australia reports September jobs data Thursday. A -110k drop is expected vs. -146.3k in August, as the lockdowns continue to bite. Unemployment is seen rising to 4.8% from 4.5% in August and further above the 4% area where the RBA sees wage pressures forming. No wonder the RBA remains in dovish mode, with rates unlikely to rise until 2024 at the earliest. Ahead of that, September NAB business confidence will be reported Tuesday, followed by October Westpac consumer confidence Wednesday.

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