04 October 2021
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US political wrangling weighs on markets

By Edward Bell

  • In the US, congress passed a continuing resolution to avoid a government shutdown at the end of last week, and approve spending through December 3rd. However, House Speaker Nancy Pelosi pulled the vote on the bipartisan infrastructure bill after failing to secure enough votes for it to pass.  Instead, the House and the Senate both approved a temporary extension of key transport programmes for another 30 days, effectively giving the Democrats until October 31st to approve the infrastructure bill and the additional fiscal stimulus package the Democrats have yet to agree on.  No progress was made on legislation to raise or suspend the debt ceiling over the weekend, and this needs to happen by mid-October to avoid a possible default.
  • Economic data released at the end of last week was mixed.  Initial jobless claims rose for the third week in a row for the week ending 24 September, but GDP growth in Q2 was revised slightly higher to 6.7% annualized from 6.6% in the previous reading. Personal spending also rose by a larger than expected 0.8% m/m in August, although the July number was revised sharply lower to -0.1% m/m. The core PCE deflator, the Fed’s preferred measure of inflation, rose to 3.6% y/y in August from 3.5% in July.
  • US manufacturing continues to show strong growth, with the Markit manufacturing PMI coming in higher than the flash estimate at 60.7 in September, while the ISM manufacturing index rose to 61.1 from 59.5 in August. The employment component of the ISM survey remained relatively weak at 50.2. 
  • In the UK, Q2 GDP was revised higher to 5.5% q/q and 23.6% y/y (22.2% previously).  However, fuel and other shortages, tighter fiscal policy (the ending of the furlough scheme last month and higher taxes next year), and the prospect of higher interest rates are likely to weigh on growth going forward.   
  • The IMF completed its annual Article IV mission to the UAE, commending the authorities on their “early and strong” response to the coronavirus pandemic and said it expects non-oil growth to exceed 3% this year. Going forward, the Fund recommended that additional support measures should be targeted only at those sectors and firms most in need of it, and highlighted that there remain risks to the outlook, most notably from a resurgence of the pandemic. 
  • In its preliminary budget statement for 2022, Saudi Arabia has revised up its estimated 2021 budget revenue by 9%, and also revised up its forecast for oil revenues next year and in 2023. Expenditure this year will likely be 3% higher than originally planned, yielding a deficit of -2.7% of GDP in 2021 (our forecast is for a deficit of -0.6% of GDP this year).  Expenditure forecasts for 2022 and 2023 remain unchanged. 
  • The unemployment rate among Saudis declined to 11.3% in Q2 21, the lowest in a decade, although the labour force participation remains low at under 50%.  The growth in jobs in Q2 was in the public sector, as total employment in the private sector declined -2.9% q/q and -6.5% y/y. Non-Saudis accounted for -193k of the -238k jobs lost in the private sector last quarter.    
  • Qatar held its first legislative elections on Saturday, with 30 out of 45 seats on the Shura Council selected by voters. The Shura Council can introduce and approve some laws, and question government ministers if two-thirds of the Council agree to this, and the Emir retains a veto on the Council's decisions.
  • The focus this week will likely be on the September non-farm payrolls data which is due on Friday.  The market expects a gain of 470k, up from 235k in August with the unemployment rate likely to ease further to 5.1%.  Before that, OPEC+ meets today, the Reserve Bank of Australia is expected to keep rates on hold on Tuesday, but the Reserve Bank of New Zealand is forecast to raise the policy rate by 25bp to 0.5% on Wednesday. China’s markets will be closed until Friday for the National Day holidays.

Today’s Economic Data and Events

  • 18:00 US factory orders (Aug) forecast 1.0% m/m
  • 18:00 US durable goods orders (Aug F) forecast 1.8% m/m                                           

Fixed Income

  • US Treasury markets begun to unravel last week as markets price in the expectation of the Fed moving on raising rates as early as next year. Yields on 2yr USTs hit a mid-week high of more than 0.31% while the 10yr yield rose to as much as 1.5652%. Yields subsequently fell for much of the rest of the week but didn’t do enough to avoid a broad index of US Treasuries falling by 0.6%, its third consecutive weekly decline.
  • Eurodollar futures would imply at least one 25bps hike by midway though 2022 with the current legislative impasse among Democrats in the US Congress doing little to derail the outlook for tighter monetary policy. There may be some disruption in the shape of the UST curve over coming weeks if Democrats fail to pass either of their legislative projects (infrastructure and social/climate spending) or if they are unable to raise the debt ceiling. Politics more than monetary policy will be in the driver’s seat for markets in the coming weeks.
  • Beyond US Treasuries, bonds globally had a lousy week. An index of European benchmark government bonds fell for its sixth week in a row while both high yield and emerging market USD bonds fell sharply. In local currency markets, emerging market bonds managed to stem the losses somewhat by the end of the week but still ended substantially lower. Indian 10yr yield closed up 6bps at 6.245% while South African yields rose 12bps to 9.592%. In Turkey, the market is still enduring the impact of the CBRT’s decision to cut rates at its September policy meeting and 10yr yields closed the week at 17.7%, up more than 100bps on the week.
  • S&P revised its outlook on Oman’s sovereign rating to positive and affirmed the country’s rating at ‘B+’. Elsewhere in the region, FTSE Russel added Saudi Arabia to its index of emerging market government bonds.


  • A sharp deterioration in risk sentiment among rising UST yields helped propel the dollar upward last week with the broad-based DXY index rising 0.8% to 94.035. Some market recalibration at the end of the week and at the start of a new quarter helped to give back some of the gains but the dollar does appear to be on a new stronger trajectory post the September FOMC.
  • EURUSD is suffering as the main victim of the dollar’s strength and the single currency fell a fourth week in a row to settle below 1.16, a drop of 1% last week alone. With the ECB continuing to trumpet the transitory inflation narrative and accommodative policy unlikely to be changed on any near-term time frame, more EURUSD weakness seems assured.
  • USDJPY managed to withstand the dollar’s strength better, rising just 0.3% to 111.05. A change in political leadership doesn’t seem to portend any shift in fiscal or monetary policy at this stage. Meanwhile, GBPUSD fell almost 1% last week, closing out at 1.3546 as the economy shows signs of stalling while the central bank is signaling it could raise rates soon.
  • Among the commodity currencies, USDCAD actually managed to gain in favour of the loonie, abetted by the sharp rise in oil prices in recent weeks. The pair closed at 1.2648. Both AUD and NZD, however, closed lower with the AUD falling less than 0.1% to 0.7258 while the NZD fell around 1% to 0.6948.


  • Equity markets were pummeled by investors pulling out of risk in the final days of Q3 and September. The S&P 500 fell 2.2% last week, its sharpest drop since February this year, while the Dow and NASDAQ also fell sharply (down 1.4% and 3.2% respectively). Both the EuroStoxx and FTSE fell although the UK’s index has been relatively insulated thanks to a high share of resource and energy stocks in the market.
  • In Asia, markets are still reeling from the effect of the Evergrande debt crisis. Equity investors seemed to spurn the selection of Fumio Kishida as the new prime minister with the Nikkei dropping almost 5% last week. The Shanghai Composite also fell, down 1.2% over the week.
  • ADNOC Drilling surged 28% on its first day of trading on Sunday, helping the Abu Dhabi general index close higher on the day. Most other regional bourses closed slightly lower yesterday.


  • Oil prices remained well supported last week with Brent futures rising a fourth week in a row, settling at USD 79.28/b, up 1.5% on the week. WTI rose for its sixth consecutive week, gaining 2.6% to close at 75.88/b. The continued tightness in energy markets globally is shaping up for a strong fourth quarter as we enter the northern hemisphere cooling season with natural gas prices across the board remaining at elevated levels.
  • OPEC+ meets this week and pricing would indicate they have a clear window to keep adding 400k b/d per month. There is a chance they could even revise their targets upward although that may be more of a message than physically possible given near-term output constraints among some smaller producers with the group.

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Written By

Edward Bell Head of Market Economics

Khatija Haque Head of Research & Chief Economist

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Edward Bell

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