Markets remained in risk mode this week with stocks rising and 10-year US Treasuries returning to May levels close to 1.70%. Demand for inflation protection remains strong and the US breakeven inflation rate is now close to an all-time high of 3%. Oil and gas prices were broadly unchanged at high levels this week. High energy prices are also affecting metals and we are seeing prices for refined metals at very high levels amidst production shortages and persistent blackouts. The surge in demand due to China’s pandemic-era stimulus measures is over, however, and this is particularly visible in iron ore prices. We took a closer look at metal prices in Research Global – Power Crunch is supporting metal prices despite falling demand on October 18.

The euro area PMI was disappointed by the significant slowdown in the services sector, which took the composite PMI index to a six-month low of 54.3 in October from 56.2 in September. In contrast, manufacturing activity remained strong, while producer prices accelerated to the highest rate on record. In Japan, the service sector is now back in expansionary territory for the first time since the start of the pandemic due to the end of the state of emergency.

In China, a deal for Evergrande to sell a 51% stake in its property management has collapsed and we believe Beijing should take more concrete steps soon to support broader credit markets. New home price growth stagnated in September for the first time since the start of the pandemic. While slower credit growth is the main factor behind slowing house price growth, growing uncertainty about real estate developers is weighing on home sales as well.

Next week, Eurozone GDP flash numbers are likely to reflect that the services sector was not fully operational in the second quarter and therefore third quarter growth will remain high. The ECB is also meeting to discuss monetary policy, but we believe it will try to make the meeting as calm as possible. The meeting is largely a prelude to the December meeting, where the staff’s new projections will lay the groundwork for the exact calibration of their instruments. In a surprise move, key member of the Governing Council, German Bundesbank President Jens Weidmann, resigned his post this week, which will likely make way for a successor with more moderate views on monetary policy.

The release of the US Q3 GDP and PCE inflation figures are likely to generate a lot of interest in the market. The rate market now expects around two hikes next year and for these expectations to hold, in particular, inflation will need to stay high above the Fed’s average target of 2%.

The Bank of Japan (BoJ) is also meeting to discuss monetary policy next week. While the pandemic program has increased lending, they’ve been unwinding government bonds for about a year now. The reopening of the economy in October is timely at a point where exports are sharply declining in the face of lack of supply. It will be interesting how the BoJ assesses the recent significant weakening of the JPY after the cabinet warns of the need for a stable currency this week. We do not expect any change in the bank’s QQE with the yield curve control.

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Al Worden

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