Investment Bank Outlook 01-10-2021

CIBCFX FlowsJapan’s business sentiment improved in Q3, highest since 2018, large manufacturers’ sentiment rose to 18 from 14. All industry capital expenditure rose to 10.1% from 9.6%. Small USDJPY was bought on the Tankan headline, which saw print of 111.47 at the open. I supposed there were some offers at 111.50, USD backed off. Talk of bids at and below 111.20, said to belong to Japanese retail day traders whom added short above 111.60. Not expecting much, likely to see the USD grind lower towards 111.00. There are some more option downside strikes maturing today.The AUDUSD started positive, bought at the Tokyo open up to 0.7241 but turned around when US reversed into negative. Small bids surround 0.7220, I suspect, these buying down to 0.7175 linked to several corporate accounts. Furthermore, there are about AUD1.4bn worth of 0.7200 strikes due today.Weak Aussie put the USDCAD up to 1.27125, there were plenty of buyers atop 1.2700-05 area. Some talk that short-term guys who sold USD last night were stopped out this morning. Could have been those fast money. Fair number of option strikes due today, notable ones are $1.84bn at 1.2600; $900mio at 1.2700; and $1.43bn of 1.2800 calls. Canada will release July’s monthly/yearly GDP today. We think July GDP should do better than the original flash estimate, but might show a small decline despite a good contribution from consumers, while the flash estimate for August should show material gains. Market calls for monthly contraction of 0.2%, we are looking at -0.1%.Who said what US House: Delays infrastructure vote as Biden agenda bill unsettled; Democrats to continue talks on Biden agenda bill on Friday Manchin: Does not see deal on economic agenda framework tonight US Pelosi: Discussions to continue with House, Senate and White House to reach a bicameral framework agreement to build back better through reconciliation bill Sen Bernie Sanders: Infrastructure bill must be defeated tonight PM Morrison outlined the federal government’s plan to reopen the international border, which will involve seven days home quarantine for fully vaccinated returning Australian citizens and permanent residents.Credit AgricoleAsia overnight Weak risk sentiment remained the key market driver amid thin liquidity conditions overnight as China began a week-long holiday and the Hong Kong market was closed. While the recent equity market sell-off has lost some of its intensity, Asian stocks remained in the red while US and European stock futures continued to retreat. Global investors remain uneasy despite the fact that a partial government shutdown was averted in the US, after Congress passed a bill to fund the government through 3 December. That said, the Democrats failed to reach a compromise on the Infrastructure fiscal package. The vote on the bill has been delayed and could potentially take place today. The Tankan survey out of Japan released earlier today pointed at slowing corporate activity, especially among automakers, mainly due to supply chain disruptions and growing input costs and factor prices. Concerns about the slowing global economy are made worse by soaring energy costs and global central banks’ policy normalisation plans and could keep risk sentiment on the back foot for now. While the moves in G10 FX remained very contained overall, the JPY has emerged as the biggest outperformer, with the AUD and CAD as the biggest underperformers.

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Events to Look Out for Next Week

Another important week is coming up as attention is still on Congress, which needs to find a way to fund the government and prevent a shutdown as fiscal 2022 begins. Key will also be the OPEC+ meeting on October 4 to review plans for reviving production. In addition, NFPs will be out on Friday and a broad range of PMIs and other early indicators are expected during the week.

Monday – 04 October 2021

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• OPEC Meetings – 21st OPEC and non-OPEC Ministerial Meeting (ONOMM) planned for Monday, 4 October 2021, via videoconference to examine oil market developments.

Tuesday – 05 October 2021

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• Interest rate Decision and Statement (AUD, GMT 04:30) – The Reserve Bank of Australia is expected to keep its cash rate unchanged. The central bank head pushed in September back against rate hike speculation, said in the text of a speech that he finds it “difficult to understand why rate rises are being priced in next year or early 2023”. Like other central banks, the RBA seems eager to separate the QE outlook from rates, and given that the recovery has been delayed, they considered it appropriate to delay any consideration of a further taper in their bond purchases until next year.
• Composite Markit PMIs (EUR, GMT 07:55-08:00) – Eurozone’s & Germany’s  Composite September PMIs are expected to have increased, given a rise in the Services sector, leaving the composite at 59.7 from 56.3 and 61.5 from 56.0 respectively.
• Composite Markit PMIs (GBP, GMT 08:00) – September ‘s Services PMIs in UK are expected to have slightly improved, leaving the composite at 55.3, up from 54.1 in the preliminary release for September.
• ISM Non-Manufacturing PMI (USD, GMT 15:00) –The ISM-NMI index is expected to fall to a still-robust 61.0 from 61.7 in August and a 64.1 all-time high in July. Producer sentiment is unwinding the lofty peaks over the March-May period as the lift from stimulus wanes and headwinds from the delta variant kick-in, though levels remain robust, and the early sentiment indicators for September rebounded sharply. All the sentiment indicators declined on net through July-August from prior peaks, and expected further declines into late -2021 toward more historically typical levels.

Wednesday – 06 October 2021

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• Interest Rate Decision and Statement (NZD, GMT 01:00) – The RBNZ is expected to hike rates to 0.50% from 0.25%. The Bank surprised markets by leaving rates unchanged at its last meeting.
• Retail Sales (EUR, GMT 09:00) – Retail Sales should contract to -3.4% m/m in December, leaving the headline at 0.8% y/y.
• ADP Employment Change (USD, GMT 12:15) – Employment change is seen spiking to 475k in the number of employed people in September, compared to the 374k reading seen last month.

Thursday – 07 October 2021

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• China – National Day 
• Jobless Claims (USD, GMT 12:30) – The US initial jobless claims  are expected to fall -21k to 330k after a climb to 351k in the BLS survey week from 335k prior to that, leaving the measure well above the 312k cycle-low in the week of September 4. The bulk of last week’s spike was in California, while the boost from hurricane Ida unwound given the pullback for claims in Louisiana. Claims are poised to average 332k in September, after 352k in August, 394k in July, and 394k in June.
• Ivey PMI (CAD, GMT 14:00) – A survey of purchasing managers, the Index provides an overview of the state of business conditions in the country.

Friday – 08 October 2021

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• Event of the Week – Non-Farm Payrolls (USD, GMT 12:30) – A 475k September nonfarm payroll increase is anticipated, after gains of 235k in August, 1,053k in July, and 963k in June. The jobless rate should drop to 5.0% from 5.2% in August and 5.4% in July. Hours-worked are assumed to rise 0.6%, after the 0.2% August increase, while the workweek holds at 34.7 for a third month. Average hourly earnings are assumed to rise 0.3% after gains of 0.6% in August and 0.4% in July, while the y/y wage gain should tick up to 4.4% from 4.3%.
• Labour Market Data (CAD, GMT 12:30) – Canada employment jumped 90.2k in August, besting expectations, after the 94.0k pop in June. It’s a third straight monthly gain, though not as robust as the surprising 230.7 jump in June. The unemployment rate fell to 7.1% from 7.5% and is down from 9.4% at the start of the year.
• Treasury Currency Report (USA, GMT N/A) – Twice a year – It provides a detailed review of global exchange rate policies, economic conditions, and central bank and government actions around the world. Most importantly, the report outlines countries that the Treasury deems currency manipulators.

Click here to access our Economic Calendar

Andria Pichidi 

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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USDJPY is facing bearish pressure! | 1 October 2021

Type: Bearish ReversalResistance: 111.655Support: 110.805Pivot: 111.364Preference:USDJPY is on a bearish momentum. We see a possible entry if price retest our Pivot which is 111.364 in line with 23.6% Fibonacci retracement and potential dip towards our area of support at 110.805 in line with 38.2% Fibonacci retracement.Alternative Scenario:Price may shot up to our 1st resistance at 111.655 in line with 61.8% Fibonacci retracement and graphical swing high.

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Wine of the week: a heavenly and exotic Lirac

2020 Lirac Blanc, La Fermade, Domaine Maby, Southern Rhône, France 

£14.50, yapp.co.uk

The wine-tasting invitations are flooding in and, when Yapp sounded the trumpet announcing a specialist Rhône extravaganza, I dropped everything to attend. Yapp has been the most famous Rhône specialist in the UK for all of my 35 years in this wonderful business, and so you will forgive me for writing you a shopping list of essential purchases this week, starting with this heavenly and extremely keenly priced white Lirac. Exotic, smooth, detailed and refreshing, give white Burgundy the heave-ho for a week or so and invite this wine into your repertoire.

In addition, 2020 Argiles Blanc St Gayan (£9.95) is a crazy bargain and a lovely light-white glugger for all-purpose entertaining. The 2020 Châteauneuf-du-Pape Blanc Père Caboche (£25.50) is one of the finest value and most impeccably balanced whites I have seen from this renowned estate. The Crozes-Hermitage Blanc Alain Graillot (£25) is a snip to secure a white Crozes from the most famous of all estates in this dramatic region. The 2020 Le Petit Caboche (£11.50) is an ebullient, forward-drinking red from Vaucluse, and it is already into its stride. The 2019 Lirac Rouge Maby (£15.25) is the red version of my featured white, and it is sensational. The 2019 Sainte-Agathe Domaine Vernay (£24.75) is an epic syrah with Côte-Rôtie-esque pretension. The 2017 Crozes-Hermitage La Guiraude Graillot (£42) was simply jaw-dropping. And finally, the NV Clairette de Die Achard (£17.95) is a hilarious fizzy sweetie.

Matthew Jukes is a winner of the International Wine & Spirit Competition’s Communicator of the Year (matthewjukes.com)

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Caterham’s latest pocket rocket

British car marque Caterham has introduced its lightest model yet. That’s no mean feat given that “these titchy two-seat sports cars have never been ripe for fat shaming”, says Rowan Horncastle on Top Gear. The new Seven 170 is “edging on anorexic”. It weighs just a little over 440kg, “which is about two times as heavy as the heart of a blue whale” or half that of an Alpine A110, a car held in high regard by automotive weight watchers. It is “ridiculously light” and this at a time when cars tend to be getting ever heavier.

The Seven 170 follows in the tracks of the simple Caterham 160 of a few years ago, and follows the same Japanese Kei car (the smallest road-car category in Japan) principles. Under the aluminium sardine-tin bonnet is a Suzuki K-car 660cc, three-cylinder unit, boosted by a tiny turbo. “In a world of 600bhp super saloons and 2,000bhp EV [electric vehicle] rocket sleds, the 170’s power and torque figures look like typos: 84bhp and 85lb ft, respectively.” Nor will you find anything in the way of driver assistance. “None. Zip. Nada.”

But it is precisely this paucity of power and weight that is the “ultimate expression of the brand”, says Curtis Moldrich for Car. It has the power-to-weight ratio of a daddy-long-legs. “It feels frantic and chaotic – but never slow.” But what the 170 lacks in horsepower, it makes up for in “visceral communication and fun”. 

This is also Caterham’s least-polluting car, delivering 58.4mpg and 109g/km of carbon dioxide, “which, given that it can hit 60mph in less than seven seconds, shows what saving weight and reducing frontal area can do for you”, says Matt Prior in Autocar.

The 170 comes in two flavours. There’s the S version that comes with the standard weather gear, heater and carpets. And there’s the more racey R, with its sports suspension pack, carbon fibre dashboard and composite seats. The S will set you back £22,990 (£1,000 more for the R) if you build it yourself. Caterham will do it for you for £2,395.

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The style and glamour of the Goodwood Revival

When it comes to classic car events, the Goodwood Revival simply has no equal. It is held over three days in September on the Goodwood Motor Circuit, which has over the years hosted racing, testing and track days and even non-championship Formula One events, and brings together great cars and vintage style to create one giant festival. Held every year over the last three decades, it fell victim to Covid-19 in 2020, but has returned this year.

A producer of legends

The original Goodwood hosted several motor-sports legends, including Graham Hill and Stirling Moss, to whom this year’s festival was dedicated, but three time Formula One world champion Sir Jackie Stewart has had the longest association with the track. As Stewart told me in the Rolex Drivers’ Club, his first experience of Goodwood was at the age of 14, when he accompanied his elder brother Jimmy, who won a trophy racing a C-Type Jaguar.

© Rolex/Guillaume Mégevand

Later, the younger Stewart would himself race at Goodwood. He got his big break when testing a car at the track, catching the attention of Ken Tyrrell and an eventual place in Tyrrell’s Formula One team. So it’s not surprising that Stewart has a soft spot for the Revival. “No Grand Prix circuit in the world brings as many different types of cars, or different types of people, to one place,” he says.

The core of the Goodwood festival is a large number of races (15 this year) involving everything from Mini Coopers to Grand Prix racing cars. Goodwood may no longer be the fixture on the professional circuit that it was in the 1950s and 1960s, but, as Stewart emphasises, the contests produce plenty of “hard driving” from “up and coming” young drivers and veterans alike, including 2009 world champion Jenson Button.

Goodwood: the family-friendly car event

But the point of the revival, says Stewart, “is not necessarily to highlight the driver, but to demonstrate the quality of the cars”, as well as creating an atmosphere that celebrates the “style and the glamour” of Goodwood’s heyday. 

“Goodwood is the ultimate family-friendly event,” adds Revival regular Neil Stephens. “Even those who aren’t big car fans can’t fail to enjoy the vintage clothes and the other entertainment.” Period dress is only required in a few places, but let’s be honest here, who would want to miss the opportunity to dress up as an American flying ace, a 1950s Teddy Boy or 1920s moustachioed gent?

The carnival continues even after the last chequered flag is waved: the aerodrome is filled with vintage planes and military equipment; the “Over the Road” section hosts a huge sale of period memorabilia, with free screenings of classic films and a large bar. On the journey back to the train station in an open-top bus, we were buzzed by a Spitfire silhouetted against the setting sun, a perfect end to the day.

The best place to stay 

The Revival isn’t the only major event that takes places at Goodwood. The motor track also hosts the Festival of Speed, held during the summer. The 12,000-acre estate also contains the Goodwood Racecourse. The most elegant way to experience all the attractions, especially if you’re attending for more than one day, is to book a room at the Goodwood, a 91-room four-star hotel. 

© Goodwood Hotel

It has all the amenities you’d expect at such a prestigious location, including access to a gym, pool and the adjoining health club. It also has two restaurants: the Goodwood Bar & Grill, for informal dining, and the Farmer, Butcher, Chef, which sources ingredients from the estate’s farm. The designers brought in by the Duke of Richmond (who owns Goodwood) have worked hard to develop a “country-house feel”, says the manager, Miguel Abellán van Kan.

Complimentary vintage taxis shuttle you to the events at Goodwood and the hotel is lauded for such attention to detail. Indeed, van Kan expects the venue to become increasingly popular for corporate away days as the era of Covid-19 and Zoom change the emphasis from quantity to quality. He adds that several families have booked whole wings of the hotel in order to enjoy a traditional country-house Christmas experience. I don’t blame them at all.

Rooms at the Goodwood Hotel start from £150 per night.

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Dollar Edges Higher; Key Inflation Data Due

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Daily Market Outlook, October 1st, 2021

Daily Market Outlook, October 1st, 2021 Overnight Headlines Asian Factories Stagnate As China's Slowdown, Supply Constraints Hit Japan Business Mood Improves As Firms Raise Investment Plans BoJ Debated Risks From Supply Constraints, China Slowdown - Sep Mins Japan’s Kishida Plans To Dissolve Parliament Oct. 14 - Jiji Japan's Kishida To Name Yamagiwa As Economy Minister - Kyodo Growth Accelerates For The Australia Manufacturing Sector In Sep European Union Postpones FTA Negotiations With Australia China Orders Top Energy Firms To Secure Supplies At All Costs China Boosts Rare-Earth Quota 20% To Shield Supply Chain From US North Korea Says It Has Test-Fired An Anti-Aircraft Missile Dollar Heads For Best Week In Months As Fed Tightening Looms Oil Slips As OPEC+ Weighs Output Boost For Tight Market OPEC+ Considers Options For Releasing More Oil To The Market Asia Stocks Fall On Concern Over U.S. Bill Vote, China Energy Wall Street Posts Monthly Loss, Worst Quarter Since Covid Outbreak BMW Lifts Guidance as Higher Car Prices Counter Chip Woes GM, Ford Extend Some Production Cuts Due To Chip Shortage The Day Ahead Economic Data (GMT) • 06:00 DE Aug Retail Sales MM 1.5% f'cast, -5.1% prev; YY 1.9% f'cast, -0.3% prev • 07:50 FR Sep Mfg PMI 55.2 f’cast, 55.2 prev • 07:55 DE Sep Mfg PMI 58.5 f'cast, 58.5 prev • 08:00 EZ Sep Mfg PMI 58.7 f'cast, 58.7 prev • 08:00 EZ Sep HICP Flash YY 3.3% f'cast, 3.0% prev • 08:30 GB Sep Mfg PML 56.3 f'cast, 56.3 prev Looking Ahead – Events, Other Releases (GMT) • 15:00 ECB Schnabel speaks at an NY Fed evenG10 FX Options Expiries for 10AM New York Cut(Hedging effect can often draw spot toward strikes pre expiry if nearby) EUR/USD: 1.1570-75 (443M), 1.1600 (440M), 1.1700 (390M) 1.1710-20 (500M), 1.1800-10 (443M), 1.1850-60 (900M) 1.1880-95 (660M) USD/JPY: 109.50 (450M), 110.00 (400M), 110.50 (425M), 110.65-70 (1.1BLN), 111.00 (1BLN) GBP/USD: 1.3550 (340M), 1.3800 (203M) AUD/USD: 0.7200 (1.7BLN), 0.7250 (505M), 0.7300 (285M) USD/CAD: 1.2575-80 (932M), 1.2600 (1.83BLN), 1.2700 (900M) 1.2715-25 (1.2BLN), 1.2750 (907M), 1.2775 (503M) 1.2800 (1.43BLN), 1.2850 (2.04BLN), 1.2900 (650M)Technical & Trade ViewsEURUSD Bias: Bearish below 1.17 Bullish above EUR/USD in stasis at lows, same for EUR crosses EUR/USD, EUR crosses in stasis at recent lows, heavy with risk off Trading very light given China/Hong Kong holidays, Australia off Monday EUR/USD 1.1564-83 EBS, above 1.1563 low o/n, presumed 1.1550 option KOs Defense of these barriers and more below at 1.1500 strike supportive Stops eyed below both levels though, breaks extremely bearish Option expiries today - 1.1560-75 E614 mln, anchor of sorts E549 mln more above between 1.1590-1.1600 strikes EUR/GBP 0.8598-0.8605, steady after o/n fall, EUR/CHF 1.0783-98, heavyGBPUSD Bias: Bearish below 1.36 Bullish above. Soft as risk soured – safe haven USD weighs -0.15% - risk off, on U.S. failure to pass infrastructure plan... Asian bourses fell, E-mini S&P -0.5%, cable traded in a busy 1.3445-80 range UK supply chain issues weigh..., but weakness today on strong USD Charts; momentum studies, 5, 10 & 21 daily and weekly moving averages slide 21 day Bollinger bands expand - strong bearish trending setup 1.3419, 38.2% May 2020 to 2021 top is initial resilient support 1.3593 10 DMA capped the recent fall - now pivotal resistanceUSDJPY Bias: Bullish above 109 Bearish below JPY crosses heavy, risk off at October start USD/JPY on hold in low-111 area after sell-off yesterday on term-end flows Asia 111.24-48 EBS, offers eyed from @111.50, bids from ahead of 111.00 Option expiries supportive, $2.6 bln 110.50-111.00, $1 bln alone at 111.00 Monday to also see $620 mln in expiries between 111.25-30 strikes Talk Japanese investors eyeing timing, levels to buy more US bonds Risk off in Asia and US bonds bid, yields soggy, Treasury 10s @1.480% Despite push back in US yields, bias still up, debt ceiling issue resolved Nikkei -2% @28,861, talk in some quarters tax on stock gains to be uppedAUDUSD Bias: Bearish below 0.73 Bullish above Mixed markets, but the primary trend remains lower Touch firmer, after closing up 0.75% on month end demand and profit taking Mixed markets early - E-mini S&P +0.2%, Brent oil +0.4%, but ASX 200 -1.7% EU postpones Australian trade talks amid submarine deal fallout... Poll forecasts no RBA hike at least till 2024 on soft wages... Charts; 5, 10 & 21 daily and weekly moving averages head south 21 day Bollinger bands head lower - bearish trending setup Initial target is a test of the 0.7106 August and 2021 base Close above 0.7304 21 DMA needed to end downside bias

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Bitcoin rises 5.2% to $43,717

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Dollar to End Month Near One-Year Highs as Yields Flourish in September

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New money: Central banks lay out operating manual for digital cash

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US GDP, Weekly Claims & US Open – LIVE

It’s been a week, month and even Quarter dominated by the rally in Yields and the spectre of inflation, onto the Central Banks tilting more towards hawks as tapering time frames and even rate rises were on the agenda.

Click here to access our Economic Calendar

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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What is the US “debt ceiling” and what happens if it is not raised?

Somewhat unusually, the US government has a self-imposed legal limit on the amount of money it can borrow to fund itself. This is called the “debt ceiling”. If it looks like the government needs to spend more than this limit, then that must be authorised in Congress. If Congress fails to authorise a new limit, the government must stop spending money. All activity funded by the federal government comes to a sudden halt. 

In less polarised times, a rise would usually be approved with little fuss. But for the last decade or so, the debt ceiling has been used as a political weapon, with opposition politicians happy to use the threat of a government shutdown to further their own aims, score political points, or just cause trouble. 

The House of Representatives – the lower chamber of the US government – has already passed a bill to raise the debt ceiling. But it must now pass a vote in the Senate, where the Democratic Party has 50 of the 100 seats, plus the vice president’s vote. To pass, however, the bill needs 60 votes.

An attempt to pass the bill on Monday failed to get enough votes in the Senate. A second attempt on Tuesday also failed. And Republicans have also blocked a way for the Democrats to raise the ceiling alone. Senate minority leader Mitch McConnell blocked a motion by Chuck Schumer, the majority leader, that would have allowed an increase with a simple majority vote. 

Why is the debt ceiling so important?

The federal government is heavily reliant on debt. More often than not, it spends more than it earns from taxation. To cover the shortfall, the government borrows. Sounds simple. But the US breached that limit on 1 August, prompting the Treasury to take some “extraordinary measures.”

But even those extraordinary measures are not permanent, and at some point the government will run out of money. The Treasury estimates that date to be 18 October because “at that point, we expect the Treasury would be left with very limited resources that would be depleted quickly,” US Treasury secretary Janet Yellen told congressional leaders this week. 

Raising the debt ceiling is important, as it makes it less likely the US will plunge into recession or default on its debt. The world’s largest economy defaulting on its debt would be a terrifying concept that would hit global financial markets hard. Such a default would probably send the dollar tumbling. Spending on many critical programmes would come to a halt. 

What is the latest position?

Senate minority leader Mitch McConnell insists that Republicans will not support raising the limit. This is similar to what happened in 2011 between Republicans and the Obama administration. The spat back then eventually prompted the US’ credit rating to be downgraded for the first time. 

While arguments over debt ceilings are common, it’s a bit more surprising that it is happening this year as the pandemic has meant the US government pouring billions more dollars into the economy than it normally would. US Federal debt is currently at about $28.43trn, higher than the current debt ceiling of $28.4trn.

The Republicans are opposed to raising the ceiling as they believe it will pave the way for Democrats to pass their $3.5trn Build Back Better spending package. 

Can the Democrats still raise the debt ceiling alone? 

Biden can technically still raise the ceiling alone, albeit through drastic means. Democrats could use the budget reconciliation process to foster a majority vote in the Senate. Biden’s $1.9trn stimulus package was passed in this manner earlier this year. 

And according to David Super, Georgetown University’s law professor, the best solution may be to just eliminate the debt ceiling entirely. “The Congressional Budget Act gives Democrats the chance to do a stand-alone reconciliation bill on the debt limit if they want,” he told the Washington Post. 

So, the Democrats could form a reconciliation bill and create another bill that cancels the debt limit. But these options are a last resort for the Biden administration. 

Has the US defaulted before?

The US government has defaulted on its debt before. As Forbes points out, the US defaulted on some Treasury bills in 1979.

The default was temporary though, as the Treasury did eventually pay the investors after a short delay. A default by the US government in current times is almost certainly going to leave much longer lasting damage. 

What effect will a further delay or default have on the markets?

A default by the US government would send shockwaves across the world. 

As Beth Ann Bovino, chief US economist at S&P Global Ratings, points out: “The impact of a default by the US government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.”

Such a collapse would also hit the US bond market which until now has been seen as the ultimate safe haven. 

And not even the US Federal Reserve, the world’s most powerful central bank, thinks the economy can weather such a scenario. John Williams, president of the Federal Reserve Bank of New York, said it could lead to an “extreme kind of reaction in markets”. 

And according to Moody’s Analytics, gridlocked discussions regarding the debt ceiling could take six million jobs out of the economy, cause the unemployment rate to climb from 5% to 9% and cause the stockmarket to lose a third of its value. 

If you are an investor, the best thing you can do is to not panic. It is likely that the US government will come to some sort of agreement, albeit with a delay. After all, nobody actually wants the world’s largest economy to default.

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Rising bond yields are unnerving markets and it could get worse before it gets better

A quick reminder before we get started this morning –don’t miss our webinar on Wednesday 20 October with BlackRock Smaller Companies trust.

I’ll be talking to manager Roland Arnold about his views on the outlook for the UK’s smaller companies against the current turbulent backdrop. Don’t miss it – register free here, and you’ll be able to watch it later even if you can’t tune in on the day.

Markets have been jittery over the past month. We haven’t seen a crash – or anything like a crash – but the relentless rise of the S&P 500, for example, has taken a bit of a knock. It last hit a new high on 6 September, and it’s been drifting lower since.

The best word for asset markets as a whole is probably “unsettled”. So what’s going on?

What’s rattling markets?

The pound has tanked in recent days. Energy prices are rocketing – oil hitting new eight-year highs, natural gas going through the roof. Gold is having a dreary time of it.

Equity markets are mixed – the FTSE 100 likes weak sterling and strong oil, so it’s doing better than most, but both the Nasdaq and the S&P 500 are struggling to regain their momentum, while Japan’s Nikkei is also wobbling around the 30,000 mark.

And then of course, there’s the big boss market of them all – the US Treasury market. US government bonds have been falling in price, which means yields have been going up.

As Dominic noted yesterday, this is not an easy environment for an investor to navigate. But what lies at the heart of this present discombobulation? I want to try to pick it apart a bit today.

Unless you’re a short-term trader, you really don’t need to worry about the odd bit of market quicksand. But it is helpful to wrap your head around the long-term trends so that you can work out if you need to make more significant adjustments to your asset allocation.

The big picture issue is straightforward: investors have grown used to trading in markets which are underpinned by the presence of central bankers who are willing and able to buy government bonds – the foundation assets on which all else rests – at whatever price is on offer.

This has suppressed volatility, and it has helped to keep interest rates low.

The one big risk to this comfy world is, and always has been, the return of inflation. If the outside world is disinflationary or even deflationary, then central banks can print what they like. You’ll create lots of distortions – rampant wealth inequality for one – and what Austrian-School economists would describe as “malinvestment”, but you won’t breach your inflation target. And that matters, because it means you can keep going with the money printing and the volatility suppression.

The problem now is that inflation is returning, and it’s returning fast. It’s already gone beyond the early definitions of “transitory”. Transitory no longer defines a specific time period so much as a specific type of inflation.

As long as soaring costs don’t get passed into the wider economy (mainly via ingrained wage rises), central bankers hope that supply chains will eventually fix themselves and that, in the meantime, they can wait it out.

But it’s clear that they are nervous about all this. The word “transitory” remains, but the more they say it, the greater the sense that they are just whistling past the economic graveyard.

This is why you are seeing central bankers still saying “transitory” even as they’re becoming steadily more hawkish at the edges. And the market doesn’t like that.

Bond yields could spike higher

One of the most obvious reflections of this is the rise in bond yields. The US ten-year bond has gone up from 1.3% to 1.5% in the last two weeks. That doesn’t sound like much, but it’s been quite a fast move, and when you have as much debt to roll over as the US does, every basis point (that is, 0.01%) counts.

This in turn is driving the US dollar higher (which, incidentally, is the more significant reason for the pound’s weakness – there are two sides to every forex trade, remember?)

It’s a very clear response to the fear that the Federal Reserve is going to start cutting back on the amount of quantitative easing (QE) it does (“tapering”).

Mohammed El-Erian, a man who presumably understands his bond markets, given that he was high up at bond fund giant Pimco for a long time, wrote about this in the FT yesterday.

The danger, he says, is that we might see “yields suddenly ‘gapping’ upwards given that we are starting with a combination of very low yields and extremely one-sided market positioning.”

Unfortunately, El-Erian doesn’t really have much to offer (in this piece at least) beyond diagnosing the problem. In effect, markets might have another taper tantrum.

So what would that mean? Central banks – the Fed specifically – will want any transition to go smoothly. This is why Jerome Powell, the Fed chair, has been at pains to emphasise that the taper is entirely separate to interest rate rises. He’s pitching it more as a way to unwind emergency support, rather than as a runway towards higher rates.

You can see why Powell might think this. Ironically enough, past doses of quantitative easing (QE) have in fact pushed bond yields higher, and they’ve fallen as QE has ended. However, I wonder if that environment has now changed. Back then, markets feared deflation. So when QE ended, they acted as though the economy was going to collapse and piled into the perceived safety of Treasuries.

However, if markets are getting worried about inflation – and they seem to be – then the risk is that QE is now suppressing rather than underpinning yields. In other words, the only thing stopping markets from pricing more inflation into the bond markets is the Fed’s presence.

What does it all mean? Well, I still suspect that when push comes to shove, financial repression will be the order of the day. Regardless of what happens with inflation, global bond markets simply cannot be allowed to reprice to more “normal” levels because that would literally bankrupt most nations.

There’s an interesting quote from Powell, speaking at a virtual conference of central bankers yesterday hosted by the European Central Bank. Powell was asked at one point whether the US had “overdone” it with public spending and monetary policy during the covid pandemic.

Here’s how he replied: “I think the historical record is thick with examples of undergoing it, and pretty much in every cycle, we just tend to underestimate the damage and underestimate the need for a response. I think we’ve avoided that this time.”

That’s very telling. I think it demonstrates where the central bank mindset is these days. We might be going through a wobble right now, but when push comes to shove, the instinct will be to step in.

We’ll probably need another market spasm before that. Maybe we’ll get one in October, as is traditional.

Anyway – if you haven’t already subscribed to MoneyWeek magazine, now’s probably a good time to do so.

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