US tapering to begin

• As expected, the FOMC yesterday announced that it would start tapering its USD 120bn of monthly asset purchases, starting with cutting back on its purchases of USTs by USD 10bn a month and mortgage-backed securities by USD 5bn a month as the ‘substantial further progress’ in terms of the recovery it had holding out for had now been met. However, Chair Jerome Powell stressed that this tapering could speed up or slow down as required, and the benchmark for rate hikes remains some way off judging by the Fed’s tone on inflation which it still expects to be transitory. While Powell acknowledged that the timeline for inflation to ease was not clear, the Fed’s expectation is for it to start to come down by Q2 or Q3 2022. With ‘ground still to cover to reach maximum employment’, and inflation expected to ease, any hikes to the Fed funds rate appear some way off still for now.
• Jerome Powell is not the only major central bank head pushing back against rate hike expectations this week. ECB President Christine Lagarde was doing the media rounds yesterday, where she reiterated that a rate hike in 2022 was unlikely. ECB officials are also of the view that these inflationary pressures remain related to the post-pandemic reopening and will ease next year. All eyes will now be on the BoE meeting later today, where some of the messaging from officials in recent weeks has been mixed.
• Turkish CPI inflation accelerated in October, but came in lower than expectations nonetheless. On a y/y basis, price growth was 19.9%, up from 19.6% in September but slower than the projected 20.4%. The core inflation rate slowed to 16.8%, from 17.0% the previous month, but PPI inflation accelerated to 46.3%. This was up from 44.0% in September, and faster than consensus projections of 41.4%, suggesting that there are further potential upside pressures on consumer prices in the coming months. The latest inflation print takes Turkey’s real interest rate to -3.9% following two recent cuts to the one-week repo rate.

Today’s Economic Data and Events

16:00 Bank of England bank rate, %. Forecast: 0.1%

16:30 US initial jobless claims, week ending October 30. Forecast: 275,000

Fixed Income

• The Federal Reserve announced it would start tapering its asset purchases at the November FOMC which concluded overnight, drawing down the pace of UST and MBS buying by USD 10bn and USD 5bn per month for at least November and December. The tapering announcement came in line with our own and market expectations but the Fed hasn’t given a set path for the duration of tapering asset purchases, suggesting they could speed up or slow down as conditions warrant.
• Language around inflation remained dovish and still more or less in line with the view that the price increases affecting the US economy are transitory. In his press conference after the FOMC, Fed chair Jerome Powell said that the Fed can “be patient” but “will not hesitate” if inflation gets to levels that need a response. All told, the FOMC looks to us like a dovish tapering, not a panic to catch up with inflation at +5% in the US at the moment.
• Markets took the FOMC largely in their stride as the tapering announcement was widely expected. Yields on the 2yr UST rose a bit less than 2bps to 0.4659% while the 10yr gained 5bps to 1.6034%. Eurodollar futures fell slightly although the overall market expectation—not our assessment—for two hikes in 2022 remains intact. The relatively modest response looks, to us at least, that the Fed hasn’t lost control of the market and there is still belief that it will be able to dampen down inflation if the Fed believes it is getting out of control.
• With the Fed not rushing to panic stations, emerging markets may get a bit of near-term reprieve. Overall movements in South African, Indian and Turkish bonds were limited overnight.
• FAB sold a CHF 200m 5yr green bond at 36bps over midswaps.

FX

• With the Fed coming in largely in terms of tapering and perhaps more dovish than the market was looking for on inflation, the dollar sold off overnight. The DXY index fell 0.24% to 93.864 as the Fed pushed back on the market’s more aggressive hiking timeline. EURUSD provided much of the gains, up 0.3% to 1.612 while GBPUSD added 0.55% to 1.3687 ahead of today’s BoE meeting. USDJPY was relatively unchanged but closed above the 114 level.
• Commodity currencies were generally stronger overnight with USDCAD falling 0.16% to 1.2391, AUD rising 0.26% to 0.7448 and NZD adding almost 0.7% to 0.7160.

Equities

• US equity markets took the tapering announcement in their stride yesterday, with new record highs hit at the close. The NASDAQ led the charge, adding 1.0%, followed by the S&P 500 (0.7%) and the Dow Jones (0.3%).
• The DFM continues to enjoy a boost from the announcement that a number of government owned entities would be listed on the bourse. It added 3.8% yesterday, and is now up 8.6% compared to a week ago.  

Commodities

• Oil prices recorded some heavy losses by recent standards with Brent futures down 3.2% to USD 81.99/b and WTI off by 3.6% to USD 80.86/b. WTI has also now crossed back below USD 80/b in early trade today. Markets will be watching for the OPEC+ meeting which takes place later today. We don’t expect that the producers’ alliance will respond to diplomatic pressure to accelerate the pace of production increases but backchannel negotiations may be choosing them to take account of concerns held by the US, Japan, India and other major consuming nations.
• In the US, commercial crude inventories rose by 3.3m bbl last week while there was a decent draw in gasoline stocks. Diesel inventories managed to build by more than 2m bbl though. Oil production in the US rose to 11.5m b/d, recovering all the lost output since hurricanes affected production from the end of August. Product supplied ticked higher but failed to make a dent in the prior week’s 2m b/d drop.
• Parties to the JCPOA will resume negotiations at the end of November according to Iranian, US and EU officials. The prospects of a deal still remain small but would add some downward pressure on oil prices should a timeline for the resumption of uninterrupted Iranian exports develop.

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