US Payrolls Are Due A Little Later

Markets

Yesterday was one of those days where everything fell into place. Gas prices eased 10% on expectations (or hopes) that Russia will come to the rescue with record-flows of natural gas. The debt ceiling issue was also about to be resolved temporarily after Minority Leader McConnell agreed to cut off the debate and advance legislation to the floor. The US Senate in the meantime (overnight) voted 50-48 to increase the debt ceiling with a “mere” $480bn.



A near-term default later this month is avoided but the issue will return to the table as soon as December 3. Markets didn’t care though. Risky assets surged: European equities added more than 2%, Wall Street finished about 1% higher. Even oil rebounded intraday from sub $80 to $81.85 (Brent) despite the slump in gas. USTs tanked, seeing the curve bear steepen with yields changing 1.3 bps (2y) to 5.2 bps (10y). German Bunds outperformed amid comments from ECB’s Lane and Schnabel that the current inflation and energy spike is transitory and overreacting to it would be harmful for the economic recovery. German yields finished the day unchanged. It may also explain the lackluster euro performance. The common currency ended flat against an overall weak dollar (1.1552) and gave up the 0.85 barrier vs sterling. EUR/GBP 0.847 support came within close proximity.

China opens with gains up to 1% after a week-long holiday, also supported by better-than-expected Caixin PMIs (services 53.4 vs 49.2). The PBOC slowed the pace of its daily liquidity injection to 10bn yuan vs 100bn yuan prior to Golden Week, effectively draining 330bn yuan – the most in a year. The yuan held stable around USD/CNY 6.45 but had a nice run yesterday. Other Asian equity markets trade mostly in the green with Japan outperforming on a declining yen. The dollar and the euro both strengthen marginally. The kiwi dollar outperforms. ECB chair Lagarde and US Treasury Secretary Yellen are scheduled to speak at the second day of the B20 event later today. US payrolls are due a little later. Markets expect a strong 500k job growth in September after the huge disappointment last month. We don’t expect the outcome, even if it doesn’t hit the consensus bar, to derail market expectations of Fed tapering in November. In the current market environment, hourly earnings (seen at 0.4% m/m) might increasingly grab the attention. Average readings in 2021 are markedly higher compared to recent years. Such consistent above-average earnings may start shaping policy rate hike expectations in coming months. For today we’re focused especially on long core bond yields. With the technical picture on their side, we project a further moderate increase with USTs possibly underperforming. 1.62% serves as next reference for the US 10y and -0.146% for the German variant. On FX markets we wouldn’t row against the current strong dollar/weak euro tide. EUR/USD 1.1493/95 remains crucial support.

News headlines

The Reserve Bank of India (RBI) this morning kept its repo policy rate as expected unchanged at 4%. The RBI also maintains an accommodative policy bias. At the same time, the RBA said that no further government bond purchases are needed under GSAP program due to current liquidity position. The RBI expect inflation at 5.3% for the FY 2022 and growth at 9.5%. Fiscal year 2023 baseline growth is seen at 7.8%. FY 2023 inflation at 4.5%. The yield on the 10-y Indian government touched 6.3% in a first reaction after the policy announcement but eased back to 6.27% currently, little changed. The rupee is reversing initial weakness. USD/INR is drifting back below the 75.00 handle.

Ireland on Thursday said that is prepared to join the global agreement for a minimum tax on companies. The move comes ahead of a key meeting of the Organization for Economic Cooperation and Development. The Irish government now agrees to join the effort to bring the minimum corporate tax rate to 15%, giving up its own 12.5% tax rate. Ireland agreed to the move after the text was amended from a tax rate of ‘at least 15%’ to 15%. The move of Ireland is seen as an important step to reach an agreement, but several other topics on exemptions also with other countries still have to be solved.

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