Fri, Oct 22, 2021 @ 01:17 GMT
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US Manufacturing Activity Is Slowing

Market movers today

  • Another quiet day on the macro data front will give markets plenty of time to focus on corporate earnings and Covid-19 headlines.
  • Danmarks Nationalbank will release currency reserve figures for July.

The 60 second overview

Key market questions: With little news overnight investors are still dwelling with questions on slowing industrial growth, COVID-19 delta fears impacting services, the persistency of higher inflation and the timing of Fed monetary policy tightening. We still stick to the narrative of peak reflation which historically has tended to coincide with lower returns on risk assets but no bear markets, an end to outperformance of cyclical equities over defensives, a stabilisation in metal prices, positive returns on US and German fixed income markets, a decent flattening of the US yield curve and a decline in inflation expectations. This is very much what we have seen in markets during July. That said, given the extent of the global fixed income rally in recent weeks and with a Fed tapering announcement looming in September we slowly see the balance of risk skewed towards higher yields in H2 and not least in Q4.

Manufacturing slowdown in the US: Yesterday’s ISM manufacturing release slowed for the second consecutive month and at 59.5 also fell short of analyst expectations. While this still constitutes strong manufacturing growth it does illustrate how the global industrial cycle is slowing. Initially the slowdown was led by China but now the developed markets support also seems to be slowing with the extraordinary boost from US Q1 fiscal easing fading.

Interestingly the report concluded that “all segments of the manufacturing economy are impacted by near record-long raw-material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products.” This shows how bottlenecks remain an issue for production. With inventories for production quickly being depleted it should keep a hand under future production as order backlogs remain elevated. This is also evident from the order-inventory balance which rose after two months of declines. On the other hand, these bottlenecks – including labour shortages – are contributed to rising inflation pressures of which the persistency is still unclear. The next key release for the US economy and markets is Friday’s nonfarm payrolls report.

Reserve Bank of Australia (RBA): This morning the RBA kept its key policy rate and its 3Y bond yield target both unchanged at 0.1% – this was widely expected. Meanwhile, RBA stuck to its tapering plan of reducing its bond buying to AUD 4bn a week in September. Markets had speculated that RBA could postpone these plans following the rise in Australian COVID-19 cases and the introduction of new lockdown measures. AUD rates rose and AUD/USD moved above 0.74 upon announcement.

Equities: Equites were higher yesterday with MSCI world ending just shy of the all-time high reading from last week. The lift in global indices came despite most US markets ended lower after positive opening. It was not just the risk appetite that changed during the day but also the preference for styles and sectors vent from value/cyclicals to growth/defensives. VIX is back above 19 and for us, this is another example of fact that professional investors are a lot more cautions than retail investors are currently. We still see record inflow to equities from retail investors despite the savings rate having more or less normalized.

FI: Following yesterday’s ISM release the 10Y US Treasury bond yield fell below 1.20% and 10Y German government bond yield is testing -0.50%. Furthermore, the periphery outperformed German government bonds. There is plenty of support for the European government bonds given yesterday’s QE data from ECB. ECB continue to buy at an elevated pace in the PEPP. Furthermore, in the PSPP, the buying of Germany and Italy continues to be above the capital key. We have also seen the same picture in Austria and Belgium, where the ECB buy more than the capital key indicate. The solid purchase from ECB do explain a part of the performance of German government bonds relative to swaps, where the Bund ASW-spread is above 40bp.

FX: Moves in FX major space have been relatively limited so far this week. That said the drop in oil prices have weighed on oil FX in the likes of CAD and not least NOK which continues to trade heavy. EUR/SEK is little changed around 10.20 while EUR/GBP has rebounded to 0.8550 after yet another test of 0.8500. On the back of this morning’s RBA announcement AUD has joined ZAR as this week’s top performer.

Credit: Credit markets did not move much yesterday with iTraxx Xover tightening 1bp (to 235bp) and Main unchanged at 46½bp. HY bonds closed marginally wider and IG widened 1bp.

 

Danske Bankhttp://www.danskebank.com/danskeresearch
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