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Key Market News
The financial press and investors continue to speculate about who might be the next Fed Chair Governor. Will Jerome Powell be renominated, or will Fed Governor Lael Brainard get the nod? US press yesterday reported that the White House has remained in touch with Brainard since her visit to (or interview at) the White House last week, but there were also reports that the Biden administration do not see the recent trading scandals at the Fed as disqualifying Powell for renomination. A talking point has been that Brainard, a Democrat, would effectively do her party a favour ahead of the November 2022 by remaining patient on rate hikes thus (the hope would be) to keep the stock market underpinned and growth strong. But as inflationary pressures mount and the Biden administration unsurprisingly becomes more concerned about them, they may favour choosing a governor they believe will deliver a more hawkish approach that they can frame as the government “taking the necessary steps to rein in inflation”.
Alibaba reported a record in Singles Day sales on Friday. Elsewhere in China related news, there has been an uptick in Covid-19 infections versus yesterday. As the country maintains its harsh zero-Covid-19 policy, the risk of widespread, economically disruptive lockdowns remains.
Staying with Covid-19; cases continue to rise in mainland Europe, with infection rates at record highs in Germany and regional leaders meeting today to discuss new pandemic measures. Cases have also stopped declining in the US. Elsewhere, Netherlands will impose a new lockdown, effective from Saturday night, on all people, while Austria is implementing a lockdown just on the unvaccinated.
Danske Bank “expect many countries will re-introduce (or tighten) some of the soft measures such as face mask requirements and COVID-19 green pass”. While Danske “expect a weaker relationship between new cases and hospitalisations/deaths, especially in countries with high vaccine uptakes” the bank warns that “if the waves get bigger than last year (due to a combination of fewer restrictions and a more transmissible variant), hospitalisations may still increase to the same levels as last year”. Even in the absence of harsh lockdown restrictions, higher Covid-19 public fear is a downside risk to developed market growth in Q4 2021/Q1 2022.
Eurozone Industrial Production performed better than expected in September, with production falling just 0.2% MoM and the YoY rate of increase coming in at 5.2% versus forecasts for a drop to 4.1%. Production in the bloc continues to face headwinds as a result of severe global supply chain disruptions. Elsewhere in European news, there was mixed commentary from ECB members, with ECB governing council member Simkus reiterating the bank’s expectation for inflation to fall back under the ECB’s 2.0% target in 2023, while ECB governing council member Rehn warned that the current supply chain bottlenecks may not have eased until the back end of 2022.
Equities
US equities are subdued in pre-market trade, with S&P 500 futures roughly flat versus yesterday’s closing levels around 4650. The index is on course to post its first weekly loss in five weeks, with the hot US inflation reports on Tuesday and Wednesday triggering profit-taking amid concerns that the Fed might have to pivot in a hawkish direction. Conversely, European equities are on course to post a fifth consecutive weekly gain and the Stoxx 600 this morning printed record highs above 486. European equities seem undeterred by the fact that EUR STIR markets are now pricing in two 10bps rate hikes from the ECB in 2022 and that Covid-19 infections on the mainland are surging. Strong earnings have underpinned the rally, but these risks strengthen the case for market participants to book some profits. A volatile geopolitical situation in Eastern Europe is worst watching; the bloc is dependent on Russian gas this winter and tensions are growing on the Belarusian border as the country seeks to hit back at the EU over sanctions by flooding the border with migrants.
Bonds
US bond markets were closed yesterday for Veteran’s Day but have reopened this morning. Short ends are seeing a little but more upside in wake of the recent hot inflation report with 2s +2bps to 0.52%, 5s +2.5bps to 1.235% and 10s flat at 1.56%. Bond markets are now focused on the upcoming US data and Fed speak.
Commodities
Oil is lower, with WTI down about 0.8%, though it has managed to keep its head above the $80.00 per barrel level. There hasn’t been much fresh news to drive oil, so focus has instead turned to demand side dynamics. There are some fears about a hit to demand in Europe as Covid-19 cases their surge and authorities move to lockdown. Gold has come off the boil a little but remains above $1850.
FX
FX markets are relatively contained. GBP is a little stronger amid hopes for an easing of Brexit tensions. Most other G10 majors are flat on the day, with the USD poised to clinch decent gains on the week in wake of Wednesday’s hot inflation report. The DXY is at year-to-date highs just above 95.00.
Day Ahead
UK PM Boris Johnson and French President Emmanuel Macron will meet today to discuss the fishing and Northern Ireland protocol disputes. Markets have mostly ignored Brexit news flow thus far. The main focus today will be on central bank speakers and US data. Beginning with the former; Chief Economist at the ECB Philip Lane will speak at 1350GMT, followed by BoE MPC member Haskel at 1400GMT, followed by influential Fed Board of Governors member and NY Fed President John Williams at 1710GMT. In terms of US data, we have the September JOLTs report and preliminary University of Michigan Consumer Sentiment survey at 1500GMT. Loonie traders will be watching the release of the Bank of Canada’s quarterly Senior Loan Officer survey at 1530GMT, which will update on the business-lending practices of major Canadian financial institutions.
