The rally in risk appetite on Friday and the bounce on Wall Street should make for a cautiously optimistic outlook for the near term. But it will continue to be a tug of war between worries over covid and the impacts of the increasing Delta variant infections, worries over the efficacy of vaccines, alongside expectations that central bank policy normalization is likely to be delayed further. The RBNZ already put off it presumed rate hike and it seems likely the Fed and the BoE won’t be looking to announce QE tapering anytime soon. Some feared that Fed Chair Powell could outline a path for QE removal at the upcoming Jackson Hole meeting. But we always thought that unlikely, and especially now with downside risks.
European Fixed Income Update: Bund and Gilt yields are up 3.1 bp and 3.2 bp respectively, the Italian 10-year has lifted 45.7 bp to 0.59%, despite weaker than expected PMI readings. Risk appetite generally improved and stock markets were underpinned as markets took the announcement that the Jackson Hole symposium will be a virtual meeting as a sign that tapering announcements are not imminent. Concern over China’s regulatory clampdown also eased and Asian markets rallied.
Eurozone and U.K. PMI readings confirmed that capacity constraints and supply chain disruptions are limiting the room for a further acceleration in the pace of expansion. In the Eurozone it is mainly the manufacturing sector, in the U.K. the services sector that is struggling. Firms in the U.K. in particular have flagged the need to boost wage offers to attract staff although it remains to be seen how long this lasts and whether it will translate in more lasting price pressures. Stock markets have still moved broadly higher, after a strong rally in Asia, with DAX and FTSE 100 currently up 0.2% and 0.4%.
The Fed’s Jackson Hole symposium, Thursday through Saturday, is the focal point. The KC Fed announced it is moving to a virtual-only meeting amid a covid outbreak in Teton County. Chair Powell had previously announced his speech would be virtual. We suspect Powell will continue to say progress is being made, but will also outline downside risks. We also believe the Fed needs to see the August jobs report on September 3 before making a decision. This week’s data calendar is full but none of the reports are crucial in and of themselves.
Today’s slate includes July’s existing-home sales, expected to dip slightly to a 5.840 mln pace from 5.860 mln previously. August flash Markit manufacturing and services PMIs are also slated, along with the July Chicago Fed national activity index. Supply is heavy this week with a $183 bln in shorter-dated coupons on tap, beginning with the 2-year sale on Tuesday.