The reappointment of Jay Powell as Federal Reserve Chairman will provide continuity of policy.
The Fed looks set to possibly even increase tapering and expectations of their first hike have been brought forward to June next year. The news and a couple of weak Treasury auctions provoked some sharp but contained moves in Treasuries with most parts of the curve now at higher yields than Q1 2020, not necessarily because Powell is seen as ultra-hawkish but more because his rival, and now deputy chair, Lael Brainard is a confirmed dove.
A resurgence of COVID-19 infections across Europe has led to re-impositions of harsh measures followed by inevitable protests. The ECB message hasn’t changed and they have every excuse to continue their ultra-loose policy and look set to implement a new asset purchase scheme to replace the PEPP when it expires. The plumbed in life support shows no signs of being withdrawn.
The smooth transmission of messages by the Fed and the ECB reducing volatility is in stark contrast to the Bank of England’s convulsions. The clear message from our Governor, Andrew Bailey, became to expect a hike and markets moved accordingly to discount the possibility of a hike from 0 to 100% in short order. When a hike was not delivered, dramatic moves in Gilts and Short Sterling led moves in other major sovereign curves including (unusually) Treasuries. Not a great performance by a central bank Governor and it led to plenty of comparisons to unreliable boyfriends and murmurs of over promoted regulators etc. Subsequent data remains very strong and employment numbers did not confirm any negative effect from the end of furlough, quite the opposite in fact. A hike is expected at the next meeting but unsurprisingly not with quite the same level of confidence. In the meantime, high inflation prints are unsettling and show no signs of abating, continuing to raise inflationary expectations and with over 1 million UK job vacancies, wage pressures are building.
Plenty of companies continue to access capital markets to refinance at current levels with a fair few coming to the primary market for the first time, all currencies have seen continued elevated levels of issuance. Credit spreads ended the month a smidgen wider than where they started, but remain in the middle of the range that we have seen all year.
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