Global Equities Slide, Oil Countries to Consider More Production
Last Week Review
Global equities fell 2.4% last week on uncertainty over the U.S. debt ceiling and spending bills. Developed ex-U.S. equities (-3.0%) and U.S. equities (-2.1%) fell the most, followed by emerging market equities (-1.5%). The 10-year Treasury yield rose 1 basis point to 1.46%, bringing its rise from last week’s low to 16 basis points. At one point last week, it touched 1.54%. The two-year Treasury yield fell 1 basis point to 0.26% — 5 basis points above last week’s low. Interest rate volatility pressured technology stocks and other growth-oriented sectors. The week would have been worse for equities, but they finished last Friday with a broad-based rally.
Washington Debt Ceiling Woes Linger
U.S. fiscal gridlock contributed to last week’s equity market volatility. Last Monday Senate Republicans blocked a bill that would have extended government funding to December and suspended the debt ceiling until late 2022. The debt ceiling provision was later removed and Congress passed a stopgap funding bill to avoid a government shutdown. The bill funds the government through December 3. On the debt ceiling issue, Treasury Secretary Janet Yellen expects October 18 is when the U.S. would breach its debt limit and default. Investors reacted to heightened uncertainty, but still project a very low likelihood of default. On the infrastructure front, U.S. House of Representatives Speaker Nancy Pelosi de-linked the bipartisan bill from the reconciliation bill, but there was no resolution. Neither progressive nor moderate Democrats have expressed a willingness to compromise and both bills are at risk.
Major Central Bank Leaders Discuss Inflation and Accommodation
At a European Central Bank (ECB) panel, Federal Reserve Chairman Jerome Powell acknowledged that the Fed is turning toward the process of normalization carefully and reiterated that current inflation spikes will not lead to a new inflation regime. ECB president Christine Lagarde commented that the central bank will remain accommodative. Bank of England Governor Andrew Bailey painted a more hawkish picture. Global yields rose in recent weeks and developed central banks are optimistic on future economic growth prospects. Monetary policy conditions may progress towards normalcy, but they are still a ways from being restrictive overall.
China’s Electricity Shortages Cut Production
Electricity shortages forced some of China’s manufacturing hubs to curtail production last week. Pandemic-induced supply/demand imbalances should resolve over time, but these issues present economic headwinds currently. Supply chain issues and property sector weakness may prompt Chinese policymakers to deliver more meaningful stimulus than recent liquidity injections. The timing of when policymakers would step up their easing moves remains to be seen.
This Week Preview
U.S. Jobs Data Releases on Friday
The September U.S. jobs report will be released on Friday. Projections call for 470,000 jobs to be added, a 5.1% unemployment rate and 4.6% year-over-year wage growth — all of which mark improvements from the prior month’s numbers. Barring any major setbacks, the data is unlikely to alter the Fed’s plan to begin tapering soon. Moving forward, labor market progress will mainly influence the timing of interest rate hikes. Investors are aware that before the Fed considers lifting rates there is still a lot of progress to be made. On Tuesday, final service Purchasing Managers’ Index (PMI) data will be released for the U.S. and Europe. Flash PMIs showed growth and is strong across developed regions, although Delta outbreaks weighed on services.
OPEC+ Considers Raising Output
On Monday OPEC+ is expected to consider boosting oil production, although the current agreement is more likely than not to remain in place. The meeting follows a continued rise in oil prices spurred by strong global demand. Commodity prices have come under increased investor scrutiny recently. A continued rise in prices would serve as an additional source of inflationary pressure.
Congress Chips Away
Investors will continue to react to the progression of U.S. fiscal unknowns. Meanwhile, the Reserve Bank of Australia will announce policy decisions on Tuesday, followed by the Reserve Bank of India on Friday. Neither central banks are expected to make major policy changes.
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