OECD adjusts forecasts amid risk and inflation balancing act

Edward Bell - Senior Director, Market Economics
Published Date: 22 September 2021

 

  • Markets appear to be absorbing the volatility around the potential default of Evergrande, a large and highly indebted Chinese property developer. The fallout risks from Evergrande appear highly concentrated in China even though it has a sizeable stock USD-denominated debt and there is an apparent belief that regulators in China will be able to proceed with any unwinding in an orderly fashion. After several days of being close for public holidays equity markets in China have opened but with far less of a downward move than the hysteria of the last few days seemed to warrant. Earlier today the PBOC left its 1yr and 5yr prime rates unchanged.
  • The OECD revised up its inflation forecasts for most developed economies and noted that central banks had a “difficult balancing” act to manage the risk of price growth getting out of control. The body revised its forecast for US inflation to 3.6% for 2021, up from 2.9% previously, while in the UK they revised price growth expectations up a whole percentage point, from 1.3% to 2.3%. The OECD cautioned on the need for central banks and government policy makers to avoid cementing an inflationary mindset among firms or consumers to avoid price growth becoming a self-fulfilling expectation.
  • The Bank of Japan kept policy rates unchanged at -0.1% and its 10yr JGB yield target at 0%. The BoJ voted 8-1 for the decision which comes amid some political change in the country as the LDP looks for a new leader.
  • The US House of Representatives approved a bill to raise the debt ceiling and avoid a government shutdown as early as October. However, the proposed law will still need to pass through the Senate where it is likely to be opposed strongly by Republicans in the more evenly balanced chamber. Financial markets don’t yet appear to be paying substantial attention to the risks of a US default at a time when they are dealing with a pending announcement of a tapering of asset purchases by the Fed, the implosion of a large Chinese property firm and a general slowing in the recovery from Covid-19.
  • The UAE’s energy minister, Suhail al Mazrouei, said that OPEC+ had no need to change its production plan of adding 400k b/d per month until the end of the year. Speaking at an energy conference in Dubai, minister noted that changes to output policy were not up to “a single country.”
  • Inflation in Lebanon rose to 137.8% in August, up from 123.4% in July. On a monthly basis that represented a more than 10% gain m/m. A sharply devalued currency and ruined port infrastructure have exacerbated a long-standing economic crisis in the country which critically needs assistance from international agencies like the IMF. A new government has pledged to restart negotiations with IMF officials for a rescue package.

Today’s Economic Data and Events

12:00 SA CPI y/y Aug: forecast 4.9%

18:00 US Existing home sale Aug: forecast 5.89m

22:00 US FOMC rate decision: forecast 0.25% upper bound

Today JP BOJ Policy rate: forecast -0.10%

Fixed Income

  • US Treasury markets gave back some of their gains from earlier in the week as anxiety over the Evergrande debt scenario calmed. Treasuries traded in a choppy manner, grinding upward early in the session before tempering those moves and ending the day nearly unchanged. Yields on the 2yr UST settled marginally down at 0.2139% while the 10yr also showed little change at the end of the day, closing at 1.3226%.
  • Market attention today switches to the FOMC and whether the Fed will make any allusion to the current volatility in financial markets. We still expect to see an outline for tapering announced if not necessarily any immediate change in policy. The Bank of Japan also sets policy today but with no change expected.
  • Movements in emerging market bonds were relatively limited overnight. Yields slipped on both Turkish and Indian 10yr bonds, albeit by around just 2bps while on South African bonds, yields ticked up by about 2bps.
  • PIF, the Saudi sovereign wealth fund, has said it will issue a green bond “very soon.” Sovereign green issues from the region have been limited to Egypt so far but appetite for ESG compliant debt remains high with the UK issuing its first green gilt earlier this week, raising GBP 10bn off of GBP 90bn of orders.
  • Egypt has also mandated banks to raise between USD 2.5bn to USD 3bn this month for its second tap of international markets this year. Egypt raised USD 3.8bn in February in a multi-maturity issue.

FX

  • Currency markets remained choppy overnight even if fears over contagion from the Evergrande debt crisis grew more muted. The DXY index was essentially stable on the close as strengthening in haven currencies like USDJPY (down 0.19% to 109.23) and CHF (down 0.43% to 0.9236) were offset by more weakness in pairs like AUD (down 0.3% to 0.7231) and NZD (off by more than 0.3% to 0.7005).
  • EURUSD and USDCAD closed roughly flat on the day at 1.1726 and 1.2820 respectively.

Equities

  • Having reopened from its mid-Autumn holiday, the Shanghai Composite is trading down this morning, but only by -0.6% compared to its close last week. Meanwhile, the Hang Seng closed up 0.6% yesterday and is closed today for its National Day holiday, taking some of the pressure around the Evergrande fallout off for now.
  • Markets elsewhere took a breather elsewhere too, with European equity indices bouncing back following Monday’s losses. The FTSE 100 added 1.1%, the DAX 1.4% and the CAC 1.5%. Conditions remained mixed later in the day in the US, however, as the NASDAQ gained 0.2% but the S&P 500 and the Dow Jones lost -0.1% and -0.2% respectively.

Commodities

  • Oil prices climbed overnight, taking back some of the risk-off losses from earlier in the week. Brent settled up 0.6% at USD 74.36/b while WTI rose 0.4% to USD 70.56/b. Data from the API reported another decent draw in crude inventories in the US, of more than 6.1m bbl with more moderate draw in gasoline and diesel stocks down by 2.7m bbl.

Click here to download charts and tables