Last week was a mixed week across asset markets. The S&P 500 ended the week 0.53% lower while USTs came under pressure although recovered somewhat into Friday’s close. The UST curve steepened with the 2s30s spread widening ~10bps while the UST 10-year yield pushed above 0.8% a level it has not traded at since June. The UST 10-year yield ended the week 9bps higher at 0.84%. There was also a USD 22bn 20-year bond sale for the market to absorb which came at a yield of 1.37% and a solid bid-cover ratio of 2.43.
Expectations of further fiscal stimulus is one factor weighing on USTs as stimulus package talks between House Speaker Nancy Pelosi and US Treasury Secretary Steven Mnuchin continued and appeared to edge closer to a deal but fell short of an actual agreement by Friday’s close. Whether the Senate would pass any legislation ahead of the election is less clear and with Biden looking comfortably ahead in the polls the potential for a ‘blue sweep’ increases the chance of a larger package albeit at a later date. That said, the Director of National Intelligence, John Ratcliffe, warned of election interference from Russia and Iran suggesting a contested election is not completely out of question either. Fed Governor Lael Brainard emphasised the importance of further fiscal stimulus stating: “Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialize.” Elsewhere, Christine Lagarde acknowledged an earlier than expected pick-up in virus infections was a “clear risk” to the outlook.
On Sunday, Chileans voted in favour (78% with 99% of the vote counted) of drafting a new constitution setting in place a process that should run into 2022 when a final vote on the new charter is due. In the week ahead, the path of the coronavirus pandemic will remain a focus as infections continue to increase in the US and Europe. Europe is now being forced to impose further restrictions as cases escalate potentially hindering the economic recovery. Thus, further support measures remain a focus as seen last week in the UK when the Chancellor Rishi Sunak had to put in place further support measures as the government put more areas of the country into Tier 3/Tier 2 restrictions. In Europe, the ECB meeting on Thursday will be monitored and while there is a building expectation that further support will be needed as a second wave of the virus runs its course but the ECB could well offer little more than words of support at this meeting. While the bond buying programme is expected to be expanded by another EUR500bn by the end of the year this programme has yet to exhaust the EUR1.35tn that has already been allocated to it. Data-wise in Europe, on Monday the German IFO survey will be a focus. German, French, Italian and Spanish 3Q GDP along with European 3Q GDP and October CPI are due later in the week although the impact of rising covid infections means the focus is turning to whether Q4 forecasts are too optimistic.
In China, this week is light on data with only September industrial profits. Instead the focus will be on China’s Communist Party’s plenum where the medium-term economic plans and the 14th 5-year Economic Plan due to come in force 2021-2025 are expected to be discussed with the media looking for any pointers that may emerge. Elsewhere in the region, on Thursday the BoJ meets and briefing but no change to policy is expected although there may be some revisions to economic forecasts.
In the US, beyond the path of the virus, developments on US congress agreeing a further fiscal package and the election remain important. Data-wise it is a relatively light week: the first reading of the US Q3 GDP data due on Thursday will be monitored with a strong recovery expected with the Bloomberg survey looking for +31.8% (quarterly annualised). Earlier in the week there is the September Chicago Fed National Activity Index and the preliminary reading for US durable goods orders for September and on Friday the US personal consumption and income data for September. Meanwhile, the US results season continues with a slew of corporates due to report including Caterpillar, Apple, Pfizer, Merck, Eli Lilly, Exxon Mobil, Mastercard, Visa, Facebook and Twitter.