Treasurer Risk Monitor: softer UK data, earlier tapering in the US, and German election risks

25 August 2021

Giles GaleHead of European Rates Strategy

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Breaking down trending themes & key risks to help corporate treasurers get ahead of the latest issues shaping markets.

The big picture

Softer UK economic data combines with robust labour data to produce a better outlook for credit and bond yields, but risks of an early taper in the US, lower growth in Asia and potential German election surprises are ones watch.

Risk monitor for the week ahead

  • The latest UK economic data was softer than expected, which suggests less upward pressure on bond yields and Sterling. Labour markets appear relatively robust, on the other hand. Unemployment was lower and employment growth remained strong, even if momentum is slowing. Overall, the market implication is less upward pressure on rates and GBP.
  • The Delta variant is weighing on business sentiment in the US. In the US, Coronavirus hospitalisations have risen past half the levels seen in January when they last peaked, worse than many had hoped, which has eroded business optimism according to recent survey and prompted us to mark down our growth estimates marginally. Still, we expect heightened caution in many states coupled with vaccinations to translate into a shallower wave.
  • The July Fed minutes reinforces our view on earlier-than-expected tapering of quantitative easing. As we hinted in last week’s note, we now expect tapering to be signalled in September, announced in November, and kicked off in December. The August jobs report at the end of next week may be decisive for this taper timetable, as we don’t think economic worries around the Delta variant will dissipate until at least early September. Meanwhile, we think the Jackson Hole symposium on monetary policy, scheduled for this Friday, will be a non-event – largely because the timing for any big policy announcements isn’t right.
  • Growth risks in Asia and policy shifts in China are worrying. The questions about President Xi’s intentions for reshaping the economy is unsettling local stock markets, but unlikely to be globally systemic in the same way a new wave of coronavirus infections might given the implications of the latter for global supply chains. That said, recent pandemic data out of the region is encouraging, but growth looks like it’s peaking in China.
  • European business sentiment points to ongoing strong momentum, which means growth and inflation risks are skewed higher. But from a long-term risk perspective, all eyes are on the German elections in late September. Stronger business sentiment doesn’t mean the European Central Bank with tighten policy soon, nor does it mean markets can’t be caught out by higher growth or inflation expectations (and factor that into longer term bond yields). Markets are now starting to focus more on the upcoming German elections.  The assumption is, probably rightly, that the near-term impact may be small for markets, but the SPD’s recent rise in the polls was not expected, and the longer-term implications of political transition in Germany (and potentially, pan-European policy) are significant.

Trending with treasurers

Back to school for primary bond markets

This past month has been fairly quiet in terms of new bond deals, even by August’s standards, and despite strong demand from investors. But we expect the market to open up again, starting this week in some jurisdictions and next week in the UK.

Housekeeping on risk-free rate benchmarks

Interest rate benchmark changes are also a focus for many. Those with a need to transition documents for derivatives and loans to SOFR (Secured Overnight Funding Rate), SONIA (Sterling Overnight Index Average) and/or ESTR (Euro Short-Term Rate) seem to be using the quieter period to attend to that. Click here if you’re looking for an accessible run-through of recent regulatory developments.

Chart of the week

Sustainable finance is having a record-breaking year. The first six months of 2021 has seen more global GSSS (green, social, sustainability and sustainability-linked) bond supply than in the whole of 2020, which was already a 50% increase on 2019 levels – with the largest rise in issuance seen amongst corporates. For more extensive insights into ESG regulatory developments and market trends, take a look at our monthly corporate ESG briefings here.

GSSS bond supply reaches new heights

Bloomberg, NatWest Markets

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