Taper talk will pervade market discussions in the new week, even as August’s jobs “shocker” all but ruled out an unveil at this month’s Fed meeting.
In the US, the debate can now be summarized as “Will it be November or December?”
The answer obviously hinges on September payrolls (due October 8) and how the inflation data evolves between now and the November meeting. Policymakers have conceded that the “substantial further progress” threshold is met on the inflation side of the mandate, so the CPI and PCE data from here is just a matter of gauging how tenable (or not) the “transitory” narrative is.
“In the week ahead, the Treasury market will continue to grapple with precisely how a ~500k miss in NFP translates to a bear steepener,” BMO’s Ian Lyngen and Ben Jeffery said, noting that the hotter-than-expected AHE prints that accompanied August payrolls “go a reasonable distance” towards explaining the reaction in the curve. “Assuming the taper trade has long since passed, the policy backdrop implies that accelerating inflation won’t trigger a Fed response for the foreseeable future,” they wrote, adding that “adhering to the new framework and having successfully communicated a reduction in asset purchases by year-end, the remaining risk is that non-transitory inflation causes the Fed to bring forward tightening.”
When you think about the long-end, it’s worth noting that the holiday-shortened week in the US features $62 billion in supply (10s and 30s), while syndicate desks are looking for more than $40 billion in post-Labor Day high-grade issuance over just four sessions. It’s been a while since I updated my IG issuance chart. A quick refresh shows supply closing in on $1 trillion for 2021 (figure below).
“We look for September issuance in the $140-160 billion range, including $40-60 billion next week, similar to recent history, with 2016-2019 average supply for the month of September of $149 billion,” BofA’s Hans Mikkelsen said. “On one hand, companies have front-loaded issuance since COVID to take advantage of favorable market conditions and attractive borrowing costs [and] they also still carry sizable cash war chests built up last year, which argues for less issuance needs in September,” he added. “On the other hand, with rates now going up we think issuers will see September as the last window to issue at these low coupons, which creates an incentive to continue to pull forward needs.”
On the data front stateside, I’ll be looking forward to JOLTS, due Wednesday, for a “fresh” (it’s on a lag, hence the scare quotes) read on labor market frictions. If nothing else, the JOLTS report produces some great visuals these days, and there’s nothing like flashy charts to spark debate. With the expiration of pandemic unemployment programs looming, market participants will surely enjoy ogling what’s likely to be more evidence of labor shortages. It’s important to emphasize (again) that leisure and hospitality hiring was unchanged in August (figure below).
That suggests the Delta variant undermined efforts to restaff hard-hit sectors of the economy.
Meanwhile, across the pond, the ECB is on deck. Don’t sleep on this one. Last week, there was talk of a “tantrum” when Robert Holzmann suggested it was time to start the discussion around trimming the pace of purchases under PEPP, the ECB’s pandemic QE program. Klaas Knot echoed those sentiments. Their remarks lined up with what counted as a “hot” read on eurozone inflation.
The question is whether the ECB will retain the “significantly higher pace” guidance around PEPP purchases, adopted earlier this year when bond yields were in the throes of a mini-tantrum. “The easiest option for the ECB would be to keep” the language, Bloomberg Economics said. “The central bank could begin tapering in January.”
Read more: The Holzmann Tantrum?
