October 21, 2021

Markets Today: The inflation debate heats up

The S&P 500 has extended its winning streak to a sixth day with mixed earnings and a subdued Fed Beige report not enough to derail the positive vibes

Todays podcast


Overview Can’t Stop

  • US and EU equities higher again. NASDAQ bucks the trend
  • UST curve steepens. Soft 20y auction not helpful
  • USD decline continues. NZD( @ 7206) and AUD (@ 0.7520) leading the charge
  • Fed Beige Book – Economy expanding at a “modest to moderate rate”
  • Evergrande fail to sale unit, increasing risk of default
  • Coming Up: NAB Quarterly Business Survey, US Joblless claims

Can’t stop, addicted to the shindig
Chop Top, he says I’m gonna win big – Red Hot Chili Peppers


The S&P 500 has extended its winning streak to a sixth day with mixed earnings and a subdued Fed Beige report not enough to derail the positive vibes, the VIX index trades with a 15 handle, symptomatic of the risk on environment that also sees Bitcoin making a new high. A steepening of the UST curve, exacerbated by a soft 20 year auction weighs on the NASDAQ, bucking the equity trend. No one wants a the big dollar when the shindig is on, the greenback decline extends with the NZD (@7208) and AUD (0.7522) leading the charge. Evergrande fails to sale unit, increasing risk of default.

The S&P 500 is now within a kissing distance from its September 2 record high of 4545, up 0.37% on the day with health care and utilities the outperforming sectors, up over 1.4%. Higher longed dated UST yields (more below) weighed on technology stocks with the S&P IT sector down ~0.3%. The IT heavy NASDAQ index closed the day at -0.05%, taking a breather after a five day positive run that yielded a gain of 4.51%.

Symptomatic of the positive vibes in the air, the VIX index has continued its recent decline and now trades with a 15 handle, close to its lows in the covid era . Bitcoin is another example of the market’s exuberance, trading to a new record high (over $66k) with the lunch of its first ETF seen as a big new avenue that should pave the way for a new influx of US investors. Meanwhile mixed earnings reports came and went with positive news overshadowing any negative vibes. Verizon and Anthem gained after better than expected results, but news of yet another vaccine delay hurt Novavax shares while Netflix also struggled following an underwhelming outlook. After the bell, Tesla reported revenue for the third quarter that missed the average analyst estimate.

Fed Beige book was released last night with equity market showing little reaction to the subdued tone in the report. The survey noted the US economy is expanding at a “modest to moderate rate”  with supply constraints and concerns over the delta variant affecting activity, cited as major reasons for the slowdown in growth in many districts. Price pressures were also prominently mentioned with “Most Districts reported significantly elevated prices, fuelled by rising demand for goods and raw materials,”. Slower growth and higher inflation, may not meet the strict definition of stagflation,but the odour in the air is undeniable.

Moving onto to currencies, the USD has no friends at the moment reflecting its counter cyclical characteristic. All is seemingly well, the shindig is on and thus no one wants the big dollar. The greenback is down around 0.2% in index terms and a look at the G10 board shows the USD is underperforming all pairs including JPY, the preeminent FX safe haven. It never a good idea to stand in the way when the positive momentum its on, technically the USD looks vulnerable to extend its decline with an overbought speculative community also under pressure to sell.

True to form, the pro risk NZD (+0.73%) and AUD (+0.60%) have been the outperformers overnight with the kiwi climbing above 72c and the AUD flying through the 75c mark, now trading at 0.7520 . The AUD break of its previous high of 0.7478, leaves the pair with a nice technical picture suggesting no major resistance before the 61.8% retracement level, measured from its February high, at 0.7619. Hard to argue with the price action, although when we cast our mind towards the end of the year we remain concern over the impact from China’s slowdown. The economy is besieged by a property crisis and energy crunch with the latter also a headwind for Europe and the UK. Like my BNZ colleague Jason Wong noted, we are mindful that sentiment can turn on dime.

Looking at other fx pairs, the euro has also edge a little but higher, now at 1.1650, reaffirming the 1.150 level as strong support. GBP is also up 0.24% to 1.3826 showing little negative reaction to news that UK CPI inflation remained well above the BoE’s target, with annual headline and core rates of 3.1% and 2.9% respectively, albeit slightly weaker than market expectations. The BoE expects inflation to climb further, to 4% by year-end, and the market is well priced for the first rate hike of the cycle beginning next month.

CAD is up 0.44% to 1.2309, Canadian CPI inflation was slightly higher than market expectations, with the annual headline rate hitting 4.4% and the average of key core measures pushing higher to 2.7%, further away from the 2% target. The data should cement in another tapering of QE next week, ahead of a series of rate hikes next year, with the market pricing in at least three hikes by the end of 2022.

The big news in the rates market has been the steeping of the UST curve . The back end of the curve was under pressure with longer dated yields edging higher ahead of the 20y Bond auction, but then a softer than expected outcome exacerbated the move.  The bid-to-cover ratio fell to 2.25x, the lowest ever at a 20-year reopening sale, with the yield stopping 2.5 bps above prevailing market levels (now at 2.10%). The 2y UST yield is 1.5bps lower at 0.3820%, 10y Note is little changed at 1.6490% while the 30y bond is 4.5bps higher at 2.1310%.

In other news,  China’s troubled property developer Evergrande is back in the news, after the proposed sale of a majority stake in its property management unit that would have raised $2.6b has fallen through. The 30-day grace period after missing coupons on its dollar-denominated debt is over by the end of the week, which will put it officially in default.

One of the most hawkish members of the ECB Governing Council, the Bundesbank’s Weidmann, resigned for personal reasons and it will be up for the new German coalition government, when it is formed, to make a replacement.

Coming Up

  • It’s a quiet day of data releases. This morning we get the NAB quarterly business survey and Australia’s weekly payroll jobs and wages for September 25. The Euro Area releases its advanced October consumer confidence reading and then is all about the US with jobless claims and existing home sales.
  • Fed Waller is on speaking duties again ( Hawk and “greatly concerned” about upside inflation risks). Intel and  AT&T are amongst US companies reporting tonight.

Market Prices


For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

Read our NAB Markets Research disclaimer