With North American banks closed for holidays in the US and Canada, you would think there will be minimal movements in the markets today. While that might be the case for some markets, that’s not to say it has been quiet everywhere. Indeed, the Japanese yen has sold off sharply again with commodity dollars firming up and crude oil hitting fresh multi-year highs in the first half of today’s session. Bond yields climbed higher, reflecting investors expectations that the central banks will tighten their policies in the months ahead in order to control inflation from spiralling out of control. Unsurprisingly, Nasdaq futures traded lower, along with some European indices.
The overall behaviour of the markets suggests the appetite for risk is not quite there, yet it is not full-on risk-off either. Yields have risen on inflation fears, but this has not harmed risk assets across the board. In other words, it is the “reflation” trade dominating the agenda rather than risk-off. But sentiment could turn negative very quickly, so don’t be fooled by the apparent calmness. Among other things, the energy crisis is one of the biggest risks facing investors right now. But there are also tapering fears, stagflation risks and not to mention Evergrande.
Keep an eye on rising yields – if we see an acceleration in the rally then it could ignite fresh selling for stocks. Here’s the UK 10-year yield chart:
Meanwhile, the economic calendar is fairly quiet today, but things will pick up later in the week.
Friday’s US jobs report disappointed on the headline front, but other aspects of the report as wages growth and unemployment rate both beat expectations. More importantly, the markets reacted as if to suggest the jobs report made no difference in terms of expectations about Fed’s tapering timeline.
- Chinese trade figures
- UK average earnings and jobless claims
- ZEW surveys for Germany and Eurozone
A few other Bank of England policy makers have become vocal about inflation risks. A couple of BoE officials have said inflation is proving to be hotter than expected and likely to persist longer than expected. If we see wages data catch up with inflation, then the BoE will have even less reason to keep current policy. The pound will remain in focus on Tuesday as investors respond to the latest wages and employment data.
- UK data dump including construction output, manufacturing production and monthly GDP estimate
- US CPI
- FOMC meeting minutes
On Wednesday we will get to find out exactly how hawkish they Fed was at its previous meeting and whether they were already making plans about tapering QE in November.
We will also get the latest inflation data from the world’s largest economy. CPI has already surpassed the Fed’s target and overshoot all sorts of expectations. If we see another sharp rise in prices this might trigger concerns that the Fed will taper QE faster than would ideally be the case. Stocks could drop and yields might jump if this is the case.
- Australian employment report
- Chinese CPI
- US PPI and jobless claims
- US retail sales, Empire State Manufacturing Index and UoM’s consumer sentiment and inflation expectations indices.
Stagflation concerns have been rising in recent weeks as inflationary pressures have been growing with energy prices surging etc. If the UoM survey show consumer inflation expectations have risen while sentiment towards the economy has dropped, this will provide hard evidence about the risks of stagflation.