Drivers for the Week of September 26, 2021

September 26, 2021
Here's a look at the main drivers in Developed Markets this week.
  • The U.S. 10-year yield traded Friday at the highest level since July 2 near 1.45%; with the FOMC meeting out of the way, Fed speakers become plentiful; key U.S. data will be reported this week; August core PCE data Friday could help determine whether U.S. yields will continue rising; weekly claims data Thursday will be very important given the Fed’s focus on the November jobs report
  • Eurozone reports August M3 Monday; ECB asset purchases for the week ending September 24 will also be reported Monday; this past weekend’s elections in Germany are worth discussing
  • Japan’s Liberal Democratic Party will elect a new leader Wednesday; Japan reports some key data this week


The U.S. 10-year yield traded Friday at the highest level since July 2 near 1.45%. It appears to be on track to test the June 25 high near 1.54%. Of note, 1.45% is the 50% retracement objective of the March-August drop. A break above 1.53% is needed to set up a test of the March 30 high near 1.77%. The real 10-year yield is also higher and at -0.88% is the highest since July 1. Similarly, a break above -0.82% is needed to set up a test of the March 19 high near -0.59%. If this rise in U.S. yields can be sustained, it is yet another dollar-positive factor to consider. Of note, the Fed Funds strip now has lift-off in Q4 2022 almost fully priced in.

Another dollar-positive factor to consider for the dollar is ongoing risks from China. The Evergrande saga is likely to drag on for several weeks still, with the troubled company given a one -month grace period on the missed bond payment last week. Mainland officials have been very quiet about Evergrande and so markets are likely to assume the worst. In recent weeks, the dollar smile theory appears to be working well, wherein the dollar tends to both gain from good U.S. economic news as well of from risk-off impulses.

With the FOMC meeting out of the way, Fed speakers become plentiful. Evans, Williams, and Brainard speak Monday. Evans, Bowman, Bostic, and Bullard speak Tuesday, while Powell and Yellen appear before the Senate Banking Panel. Harker, Powell, Daly, and Bostic speak Wednesday. Williams, Bostic, Evans, Bullard, Daly, and Harker speak Thursday, while Powell and Yellen appear before the House Financial Services Committee. Harker and Mester speak Friday. All Fed officials are expected to continue advancing the tapering timeline, with the aim of preparing markets for an official announcement at the November 2-3 FOMC meeting.

Key U.S. data will be reported this week. September PMI readings will come more into focus with Chicago PMI Thursday, which is expected at 65.0 vs. 66.8 in August. ISM manufacturing PMI will be reported Friday and is expected at 59.5 vs. 59.9 in August. Last week, preliminary September Markit PMI readings were reported. Manufacturing came in at 60.5 vs. 61.0 expected and 61.1 in August and services came in at 54.4 vs. 54.9 expected and 55.1 in August, which dragged the composite down to 54.5 vs. 55.4 in August.

August core PCE data Friday could help determine whether U.S. yields will continue rising. Consensus sees core PCE inflation falling a tick to 3.5% y/y. Personal income and spending will also be reported at the same time and are expected to rise 0.2% m/m and 0.6% m/m, respectively. Despite the rise in nominal yields, inflation breakeven rates remain subdued, with the 10-year trading around 2.33%.

Fed regional manufacturing surveys will continue to roll out. Dallas reports Monday and is expected at 11.0 vs. 9.0 in August. Richmond reports Tuesday and is expected at 10 vs. 9 in August. So far, Empire and Philly Fed surveys surprised to the upside at 34.3 and 30.7, respectively, while Kansas City came in slightly lower than expected at 22 vs. 29 in August.

Weekly claims data Thursday will be very important given the Fed’s focus on the November jobs report. Initial claims are expected at 330k vs. 351k the previous week, while continuing claims are expected at 2.805 mln vs. 2.845 mln the previous week. The readings last week were disappointingly high, with initial claims rising for the BLS survey week. Continuing claims are reported with a one-week lag and so this week’s reading will be for the BLS survey week. Current consensus for September NFP is 525k vs. 235k in August, with the unemployment rate expected to fall a couple of ticks to a new cycle low of 5.0%. We believe any reading in the 400-500k range would meet the Fed’s criteria to announce tapering in November.

Other minor data round out the week. August durable goods orders (0.6% m/m expected) will be reported Monday. Advance goods trade data (-$87.3 bln expected), wholesale and retail inventories, S&P CoreLogic house prices, and Conference Board consumer confidence (115.0 expected) will all be reported Tuesday. Pending home sales (1.0% m/m expected) will be reported Wednesday. September auto sales (13.3 mln annualized expected), final September University of Michigan consumer sentiment (71.0 expected), and August construction spending (0.3% m/m expected) will be reported Friday.

U.S. growth remains solid. Q2 revision (6.6% SAAR expected) will be reported Thursday but this is old news as markets look ahead to Q3 and Q4. The Atlanta Fed’s GDPNow model shows Q3 growth tracking at 3.7% SAAR, while Bloomberg consensus sees 5.0% SAAR. Of note, the New York Fed earlier this month wrote that “The uncertainty around the pandemic and the consequent volatility in the data have posed a number of challenges to the Nowcast model. Therefore, we have decided to suspend the publication of the Nowcast while we continue to work on methodological improvements to better address these challenges.”


Eurozone reports August M3 Monday. Growth is expected to pick up a tick to 7.7% y/y. If so, it would be the first acceleration since January, when M3 growth peaked at 12.5% y/y. Still, the pace is disappointing in light of the ECB’s more aggressive asset purchases and now that the pace will slow in Q4, M3 growth is unlikely to pick up much in the coming months. This is an unwanted development in light of slowing economic data, which we suspect will keep the ECB tilting dovish in the coming months.

ECB asset purchases for the week ending September 24 will also be reported Monday. This weekly number has taken on more importance after the ECB announced that it would aim for a more “moderate” pace going forward. Net purchases were EUR19.1 bln for the week ending September 17 vs. EUR14.7 bln for the week ending September 10 and EUR16.7 bln for the week ending September 3. The ECB had been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March but they have fallen a bit short in recent weeks due to thin market conditions over the summer. Now, it will likely take a few more weeks to figure out what the new pace will be.

This past weekend’s elections in Germany are worth discussing. As of this writing, the votes are still being counted and there are more mail-in votes than usual. Early returns suggest Scholz and his Social Democrats won 25.6% of the vote, just slightly ahead of Laschet and his CDU/CSU bloc with 24.4%. This is the worst postwar showing for the CDU/CSU and truly signals the end of the Merkel era. The Greens came in third with 14.7%, followed by the Free Democrats with 11.6%. The Left won 5%, while the Alternative for Germany won 10.3%. Given the splintered electorate, it will take at least three parties to form a ruling coalition. The horse-trading begins now but we foresee a leftward shift in policy under a likely coalition led by the Social Democrats and the Greens.


Japan’s Liberal Democratic Party will elect a new leader Wednesday. Whoever wins is widely expected to become the next Prime Minister as the LDP is heavily favored to win general elections this fall. In the first round of the election, each of the LDP's 382 Diet members will cast a vote and another 382 votes will be determined by around 1.1 mln rank-and-file LDP members. The latest popular polls show vaccine czar Kono the clear frontrunner with 47.4% support, followed by former Foreign Minister Kishida with 22.4%. Former Communications Minister Takaichi is third with 16.2%, followed LDP official Noda with 3.4%. 10.7% said they have not yet decided who to support. On the other hand, polls suggest Kishida is leading in the Diet vote with more than 30% support, followed by Kono and Takaichi each with more than 20% support. If no one wins an outright majority in the first round, then the top two candidates go to a run-off vote determined by the 382 Diet members and each of the LDP's 47 prefectural chapters.

Japan reports some key data this week. August retail sales and IP will be reported Thursday. Sales are expected to fall -1.8% m/m vs. a 1.0% gain in July, while IP is expected to fall -0.5% m/m vs. -1.5% in July. Last week, August supermarket and department store sales weakened sharply and suggest downside risks to sales. Labor market data and Q3 Tankan survey will be reported Friday. Unemployment is expected to rise a tick to 2.9%, while the job-to-applicant ratio is expected to fall a tick to 1.14. The large manufacturing index is expected at 13 vs. 14 in Q4, while the large manufacturing outlook is expected at 14 vs. 13 in Q2. Large all-industry Capex is expected to rise 9.3% vs. 9.6% in Q2.

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