Key Drivers for the Week of Sept. 27, 2021
TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.
- Hawkish pivots from central banks drives bond yields sharply higher
- FOMC stated QE tapering could begin soon, end in mid 2022; 10-year rate 1.45%
- U.S. data includes ISM, durables, income, consumption, and confidence on tap
- Treasury auctions $183 bln in coupons: $60 bln 2s, $61 bln 5s, $62 bln 7s
- Bevy of Fedspeakers should voice support for likely QE tapering “soon”
- U.S. fiscal policy complicates with the possible government shutdown
- Canada GDP expected to show further erosion in growth; holiday Thursday
- Japan services PPI, production, retail sales, unemployment, housing starts
- China PMIs should reflect slowing; Bank of Thailand seen on hold
- German elections may not yield clear winner for Chancellor Monday
- Eurozone CPI, ESI economic confidence, PMI, unemployment
- German data on HICP, jobless numbers, retail sales
- UK Q2 GDP expected solid, CIPS manufacturing PMI due
|US Dollar Index
Week Ahead: Bonds Bears & Biden Test
Congress & Debt Ceiling
The big mover this week is Congress as it tries to pass three key bills (infrastructure, social/green bill, and debt ceiling). Fiscal 2021 ends on September 30 and without legislation to extend or suspend the debt limit, the government faces a shutdown. As usual, the necessary legislation is being used as a political football, with the deep divide between the Democrats and Republicans making for a particularly difficult scenario this time around. Something will eventually be passed but at what cost. Here is what is being debated.
The infrastructure bill: This bill is about $1 trillion and passed in the US Senate with bipartisan support. The current state of the bill is unacceptable to most Democrats in the US House because it doesn’t include their political projects such as “clean energy, social justice, etc.”
The social and environment spending bill: This $3.5 trillion is the House Democrats’ response to the slimmed-down “infrastructure bill.” It has chuck full of political agendas, taxes, and a new “green energy plan.”
Debt Ceiling: According to our watches, Congress has until Thursday to pass a bill to raise the debt ceiling. If they fail to do so, then we could see a shutdown of the government.
Legislative Battleground: House Democrats and Biden want to pass the increased $3.5 trillion spending bill without Republican support through budget reconciliation. However, they need Sen. Joe Manchin and other moderate Democrats’ support. Manchin has stated publically he won’t support the bill. Failure to pass the bills will reflect on Biden who has increasingly looked weaker with his failure at Afghanistan and the Border.
Scenario 1: I think it is highly likely the Democrats in the House will pass the increased spending bills (at a slightly lower level) and debt ceiling limit bill in order to put extreme pressure on moderate Democrat Senators and Republicans. This will go over like “a fart in church” and cause a shutdown or serious shutdown scare as all bills fail to pass. The market will likely drop 3-10%, but could partially recover if the debt ceiling bill is passed in order for Congress to debate more. The key thing to know is that the Democrats and Biden are using the debt ceiling limit to create a sense of urgency to pass their spending bills. They will not want to give this away and will signal defeat for them. However, they don’t want to be blamed for a government shutdown.
Scenario 2: House Democrats pass the debt ceiling bill, infrastructure bill, and a much lower spending bill (say $1 trillion vs. $3.5) that Democrat Senators can support. I think this is the best strategy for Democrats as it allows a much-needed win for both them and Biden while avoiding a government shutdown. However, I am unsure that Pelosi has the support for this and it is unknown how moderate Democrat Senators will react to it. The market will likely not respond or be positive as it will signal “business as usual.”
Scenario 3: House Democrats fail to pass any bills and we have a government shutdown. Expect a full blame game between the Democrats, Republicans, and Biden. The market will likely drop 3-10% and will not come back until the shutdown is over.
Back to the Markets
It is a busy U.S. calendar this week with a number of important indicators. None will have much market impact individually, but all will contribute to the Fed’s overall policy calculus where many on the FOMC now believe the “substantial further progress” conditions for QE tapering have been met. Chair Powell has been more cautious given his concerns over the “substantial slack” in the job market. But he too is leaning toward scaling back asset purchases this year.
The condition for the labor market is “all but met” on a cumulative basis he noted last week. Hence, it won’t take much improvement in the job numbers to satisfy him and get his vote on tapering. We suspect that announcement comes in November.
While ISM, durables, income, consumption, and confidence will be monitored, fiscal policy will distract with the debt limit and a possible government shutdown looming at fiscal year-end (September 30), while negotiations on the big spending and tax bills are on tap as well.
The Treasury’s $183 bln in 2-, 5-, and 7-year auctions will also be interesting in this environment with a more hawkish Fed, a QE tapering on the way, and still hot inflation. There is a bevy of Fedspeak and we expect they will voice their support for a taper announcement later this year.
The September ISM (Friday) highlights as it includes timely information on manufacturing employment, production, inventories, and prices. We expect the index to dip back -0.4 ticks to the 59.5 level from July, versus the 59.9 in August. The slippage from the 18-year high of 647 in March largely reflects the negative impacts from materials and labor shortages and other supply constraints, rising prices, the spike in the Delta variant, and the waning impact of stimulus checks. All of the sentiment indicators have dropped on net through July-August from prior peaks, and we expect further declines into late-2021 toward more historically typical levels.
Other reports this week include August Advance durable orders where we forecast a 0.5% increase after dipping -0.1% in July. Support should come from a 0.5% bounce in transportation orders. September consumer confidence is expected to rise to 115.0 after a drop to 113.8 in August. A 0.2% gain in personal income is forecast for August, with spending rising 0.6%. Q2 Q2 GDP should be revised up to a 7.0% pace of growth, though the more relevant Q3 pace is now projected slowing to a 5.4% clip.
Supply heats up this week with $183 bln in shorter-dated coupons on offer. Because of the calendar, the Treasury will have to double up on auctions Monday with the $60 bln 2- and the $61 bln 5-year offerings on tap, to be followed by the $62 bln 7-year on Tuesday. When issued yields jumped late last week due to the FOMC’s pivot, and the concessions saw the 2-year rise to 0.300%, with the 5-year at 0.970%, and the 7-year at 1.27%. The doubling up on auctions typically makes for poor results, and this could be the case again this week. The cheapening in rates may provide little consolation as the Fed’s pivot and the bearish trend may keep bulls sidelined.
For Canada, GDP is front and center this week. The report is expected to show further erosion in the economy following the surprising drop in Q2 GDP. Our projection is for a -0.3% drop in July GDP (Friday) after the 0.7% jump in June. However, the outlook for August is looking up, with growth anticipated to have bounced back last month. The industrial product price index for August is due Wednesday. There is nothing from the BoC this week. The bond market is closed on Thursday for the National Day for Truth and Reconciliation, although the stock market will be open.