RBA and RBNZ to announce rate decisions
It is busy week next week with rate announcements from the Reserve Bank of Australia and also the Reserve Bank of New Zealand. It is also employment week for both Canada and the US. China is on holiday Monday to Thursday. Australia will be off on Monday.
Monday, October 4
- OPEC+ meeting all day
- Spain’s unemployment change, 3 AM ET/ 0700 GMT
Tuesday, October 5
- Reserve Bank of Australia rate decision, 11:30 PM ET Monday/0330 GMT. Rate expected to remain steady at 0.10%
- US ISM services PMI for September. Estimate 59.9 versus 61.7 last month. 10 AM ET/1400 GMT
- ECB’s Lagarde speaks, 11 AM ET/1500 GMT
- FOMC Quarles speaks, 1:15 PM ET/1715 GMT
Wednesday, October 6
- RBNZ rate decision, expected 0.25% hike to 0.5% from 0.25%. 9 PM ET/0100 GMT
- ADP nonfarm employment change, estimate 455K versus 374K last month. 8:15 AM ET/1215 GMT
- US crude oil inventories, 10:30 AM ET
Thursday, October 7
- US unemployment claims. Estimate 350K versus 362K last week. 8:30 AM ET/1230 GMT
- Canada Ivey PMI. Estimate 60.3 versus 66.0 last month. 10 AM ET/1400 GMT
- BOC Macklem schedule to speak. 12 PM ET/1600 GMT
Friday, October 8
- RBA financial stability review, 8:30 PM ET/0030 GMT
- Canada employment change. Estimate 61.2K vs 90.2 last month. 8:30 AM ET/1230 GMT
- Canada unemployment rate. Estimate 6.9% versus 7.1% last month
- US nonfarm payroll. Estimate 490K versus 235K last month. 8:30 AM ET/1230 GMT
- US unemployment rate. Estimate 5.1% versus 5.2% last month. 8:30 AM ET/1230 GMT
- US average hourly earnings, estimate 0.4% versus 0.6% last month. 8:30 AM ET/1230 GMT
Norges Bank Norway’s central bank raised its benchmark interest rate on Thursday, raised the sight deposit rate to 0.25%
- from zero
- the hike was as expected
The Bank said it expect to do the same again in December, another hike
- and three more hikes by the end of 2022 (to 1.25%) had become more likely.
The governor of the Norwegian central bank spoke at a press conference after:
- There is a strong recovery in the Norwegian economy
- It’s time to start a gradual normalisation of the policy rate
Banco Central do Brasil hikes its benchmark interest rate to 6.25% from 5.25%.
Headlines via Reuters from the statement (bolding mine):
- decision was unanimous
- sees rate hike of the same magnitude at next meeting
- in the current phase of rate hike cycle, this pace of adjustments is best to guarantee the anchoring of inflation expectations
- sees robust economic recovery in the second half of year
- baseline scenario and balance of risks indicate that an interest rate hike cycle should advance into contractionary territory
- elevated fiscal risk creates an upward asymmetry in the balance of inflation risks
- the current pace of rate hikes will allow the committee to obtain more information regarding the state of the economy and the persistence of shocks
- price increases for industrial goods have not subsided and should remain a pressure in the short run.
- new round of market discussion regarding inflationary risks in advanced economies could result in a challenging environment for emerging economies
Taper back on the table?
There’s a sweet spot for many markets where delta pushed back the taper but the economy remains solid and rates stay low.
Of course, that’s an impossible paradigm to hold. Yes, Powell probably won’t signal a taper this week but beyond that either delta will meaningfully hurt the global economy or delta will fade and the case for tapering will return.
At the moment, the bond market appears to be hinting at a fade in delta and rising odds of a September taper. Overall, I suspect this is more about delta and confidence this round of cases will fade quickly but I see the Fed argument too.
From where I stand, Powell’s best course of action is to preserve some optionality into the Sept meeting but emphasize that the Fed will do everything it can to support the recovery. Ultimately, a November taper hint and December announcement makes the most sense.
Despite the uptick in rates, the bond market certainly isn’t seeing any inflation.
Via a Goldman Sachs analyst research note ICYMI (on Friday) covering huge technology shares like Facebook, Apple, Amazon, Microsoft and Alphabet (Google).
GS nominate risk #1 as higher taxes, commenting on plans from the Biden administration for higher corporate and capital gains tax rates:
- proposed corporate tax rate hiked to 28% (note that Biden has indicated a 25% compromise rate)
- “FAAMG stocks have appreciated by $5 trillion during the last 5 years, accounting for 29% of the S&P 500 market cap increase during that time” … and thus a drop in these stocks will have an outsized impact on index values
#2 is the ‘higher interest rates’ usual suspect:
- low rates have been a key support for valuations for over ten years now
- the time of near zero rates could be approaching an end though
- “All five FAAMG stocks … are especially sensitive to moves in long-term interest rates“
#3 is increased regulation … GS go as far as to say “Looking forward, the greatest fundamental risk to the continued market leadership of the five largest companies appears to be the potential intervention of regulators
- … legal battles and investigations over their market power and competitive practices ranging from commercial litigation to DoJ and FTC antitrust lawsuits to Congressional probes”
GS do note on #3 though that Google has soared since the launch of the DOJ investigation (in October 2020 … price from circa $105 to circa $135).
Barkin is the president and CEO of the Federal Reserve Bank of Richmond, he has some comments crossing on the wires.
Speaking in a Bloomberg TV interview.
- you want yields to respond to what happening in the economy
- yields reflecting good news on vaccines, fiscal aid
- really hopeful that we’re at the back end of pandemic
- the Fed’s interest-rate dot plot is not Federal Open Market Committee policy
- Fed has tools to handle unwanted inflation
- inflation is not a one-year phenomenon, it’s multi-year
- expect to see price pressures in 2021
- expect strong demand, met by some supply-chain issues
- the US economy will have strong spring and summer
Re that headline I put in the, headline …. the dot plot is part of the Fed’s forward guidance. Barkin’s comments are in line with other comments from Fed officials, they are toeing the party line since Chair Powell laid down the law and told them all to shut up about tapering a month or so back.
A 75bp hike vs. the 50 that was widely expected from the Banco Central do Brasil.
- BCB add that they expect to hike another 75bps at the following meeting
- says it has initiated a partial normalisation process, reducing its extraordinary degree of monetary stimulus
Despite with the FOMC and Powell tell us I think perhaps the BCB is providing a sneak preview of what is to come from the Fed prior to 2024. We’ll see.
Higher yields remain the catalyst
The longs in the technology stocks continue to get hammered and the rotation into the cyclical continues as fears of interest rates have traders repricing the high flyers of 2020.
The final numbers are showing:
- S&P index -20.72 points or -0.54% at 3821.23
- NASDAQ index -310.98 points or -2.41% at 12609.16
- Dow industrial average rose 306.21 points or +0.97% at 31802.51
The NASDAQ index closed below its 100 day moving average for the 1st time since October 30.
Some of the oversized decliners today included:
- Doordash -11.92%
- Snowflake, -10.74%
- Chewy, -8.01%
- Zoom, -7.91%
- Nio, -7.66%
- Nvidia, -6.99%
- Square, -6.74%
- Broadcom, -6.57%
- Palantir, -5.91%
- Tesla, -5.86%
On the positive side, some of the Reddit meme stocks were in the big gainers:
- Express, +62.6%
- Gamestop, +40.1%
- Koss, +26.79%
- AMC, +15.52%
- Bed Bath and Beyond, +10.32%
Airlines also rose sharply:
- United airlines, +7.03%
- Southwest Airlines, +6.41%
- American Airlines, +4.94%
- Delta Air Lines, +3.61%
Big cap high flying names of 2020 had a tough time of it today as well:
- Facebook -3.35%
- Amazon -1.58%
- Apple, -4.13%
- Netflix, -4.48%
- Microsoft -1.79%
- Alphabet -4.3%
Other winners included:
- Walt Disney, +6.27%
- Whirlpool, +3.46%
- Ford, +3.10%
- MasterCard, +2.9%
- Citigroup, +2.82%
- Cisco Systems, +2.79%
- Exxon, +2.39%
- General Motors, +2.29%
- Home Depot, +2.16%
A summary of the main point Lloyds make about Wednesday’s Federal Open Market Committee
- policy update contained no surprises.
- left interest rates and its asset purchase target unchanged
- The Fed continues to promise that it stands ready to offer more support to the economy if warranted but there seems to be growing confidence that more action may not be needed. Nevertheless. any tightenng in monetary policy is still probably a very long way away and markets don’t expect an interest rate hike until 2024.
- Recent US economic data has actually been mixed
- the signs are that the vaccine rollout is increasing the Fed’s confidence that economic conditions will improve significantly later this year
- Hopes of further fiscal stimulus from the Biden Administration probably have provided a further boost
On the ‘tapering’ of QE question, which some officials at the Fed have indicated may commence in 2021, Lloyds remind that Powell has been quick to “stamp on this idea” and reiterated the point again at his presser.