GLOBAL CREDIT BULLETS | Monday, 6th September 2021

The Fed’s dovish turn.
Recent US data pushed the Fed on a more dovish course. The August jobs report data displayed a decent miss, with 235k non-farm payrolls created vs 733k expected. Weak jobs data confirm the slowing picture anticipated by other US indicators, such as ADP or ISM. Weakness is particularly concentrated in re-opening sectors, suggesting some impact from delta. Sluggish data make it easier for the Fed to defend a dovish stance. At Jackson Hole, Powell remarks were cautious, constraining any tightening to good progress in labor markets and anticipating hikes well after tapering has started. In the current context, carry trades have tailwind for another few months. We think a November/December announcement on tapering is still in the cards, as the past month weakness is to be contrasted with six months of good data, inflation signs remain high, and delta variant concerns temporary. Guidance on rates will instead remain dovish at least until year end.

China’s way.
In China, the government stance on internet, real estate and other sectors remain unclear, and hence market sentiment stays weak. August PMIs came in weak, and selected defaults in the property space now appear likely. As discussed in our latest Silver Bullet, China is trying a different long term policy game than Western governments. Instead of relying on debt, easy money and an unequal society, Xi is actively trying to rebalance the development model towards consumption, and away from credit and corporates. As politics is less of a constraint vs Western counterparts, implementing this new model comes at lower costs. This has positive implications for macro (rates and currencies), but can sometimes hurt investors in credit. Shorter-term, we see China’s growth and potential further easing as a key driver of markets in the coming months.

Geopolitics – troubles ahead.
Geopolitical risks will be on the rise into year-end. The US withdraw from Afghanistan and the government changeover did not trigger market vol, but changes the regional status quo, which in turn may increase uncertainty later on. Big regional players (China, Iran, Russia, Pakistan, and the Gulf States) will need to make their stance towards the new government clear, and may react in different ways to the deep governance changes we are likely to see. Also, the country will continue to see population exodus, with rising asylum requests to neighbor countries. Finally, the US exit gives green light for similar initiatives in an area which is traditionally hot. We remain wary of geopolitical risk in central Asia and think it could be a potential source of market risk in the near future.

ECB – stay the course.
Next Thursday, chances of a large change in course at ECB are slim. The market discussion has been dominated by potential for a small cut to PEPP purchases. While some alteration is possible, it seems unlikely to see a large change at this stage and the ECB will not emphasize the move as a bold hawkish move. As such, the meeting will carry little change in the monetary stance. The main questions will remain forward guidance about purchases and hikes, the end of the PEPP program in March 2022 and the extent of “substitution” into APP. We probably won’t get definitive answers, but the balance between a hawkish vs dovish meeting will depend on comments on these points. A debate is clearly going within the committee, as clear from the recent comments by Holzmann (hawkish), Villeroy (neutral), and Stournaras (dovish).  The dovish turn of the Fed also doesn’t help, as the ECB is not ready to lead a hawkish turn among central banks. European rates have recently started leading the move in global rates, suggesting the market is putting some weight on the possibility of an earlier tightening.

To read more on our latest views, please see our Silver Bullet | China’s Long Term Game or visit our Insights section.