September 09, 2021Money Education Economy In the news News Weekly update Weekly commentary
What's Happening Today
It looks to be a pretty quiet session today as we start our shortened work week. The kids are back to school and Fall is in the air. As for the Bank of Canada meeting this week, the risk of a taper is elevated; meaning that weekly purchases may go from C$2bln/week to C$1bln/week. Also, the title of Macklem’s speech on Thursday is revealing (‘QE and the Reinvestment Phase’) which, as our rates strategy team pointed out over the weekend, suggests that the Bank is still on track to begin the reinvestment phase in early 2022. The more important question is how the Bank will reinvest. If our rates team is right, that means reinvestment will move to the primary market which will curb growth in bank reserves and potentially keep short rates grounded. That has implications for USD/CAD potentially, especially if the Fed proceeds with tapering and the debt ceiling issue is resolved in the months ahead.
Speaking of the Fed. Given the lukewarm August employment report, the damage from Ida, the Delta variant, and the uncertainty with the end of PUA, we’ve lost a lot of confidence in the view that the Fed will signal a taper later this month. A delay to the signal would be a setback, but not a game-changer. The Fed is already bent on reducing monthly stimulus at this point, and barring a material hit to incoming data, that should remain the base case. With Labour Day now past, several federal pandemic unemployment assistance programs have expired. The Century Foundations estimates that more than 7 million unemployed will lose all benefits along with 3 million who will lose $300/week in state-level assistance. The most popular view amongst the people we speak to is that ending these programs abruptly will result in immediate economic upside as workers are reabsorbed back into the labour force. However, recent research has shown that this might not be the case (using data from states that ended federal programs early). Firstly, because re-entrants into the labour force haven’t been able to find jobs as easily for a variety of reasons. Secondly, because spending has plunged amongst those that have had benefits removed.
Across the pond, European stocks are slightly lower as markets turn cautious ahead of the European Central Bank meeting on Thursday. Prime Minister Boris Johnson is expected to announce a 14 billion pound increase in taxes breaching election promises. Investors expect the European Central Bank could start talking about tapering its bond purchases sooner rather than later. On the Brexit front (yes – that’s still a thing) – the UK has extended the grace period on the Northern Ireland protocol ‘indefinitely’ while talks continue on a long-term solution. The current extension is set to expire next month.
Asian markets closed mostly higher as Japan ended positive on talk of additional fiscal stimulus, and China’s August trade data came in above expectations. China’s exports jumped 25.6% year-over-year in August, that was above expectations for a 17.1% rise. Also the Reserve Bank of Australia announced its decision to hold steady on the cash rate target. In Japan: The LDP leadership election is set for September 29th and local media says that former foreign minister/current vaccination czar Taro Kono has the momentum right now. As for his policy views, his Wikipedia page says that he is commonly dubbed as a “maverick” and “known for expressing his views on politically sensitive issues”. Ultimately, this is largely a caretaker role until he wins the next election and has a clear mandate. Current polling by Kyodo News has Kono at 32%, Ishiba at 26.6%, Kishida at 18.8%, Noda at 4.4%, and Takaichi at 4%.
Oil prices were mixed as Saudi Arabia’s sharp cuts in crude contract prices for Asia sparked fears over slower demand, but strong Chinese economic data capped losses.
As always, please give us a shout if you have questions or wish to chat.