Treasury Risk Monitor: politics, supply chain bottlenecks, and higher yields in Europe

10 September 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

Politics is looming large over markets this week, with Germany’s elections on the 26th of September and the US debt ceiling deadline in October. But for many of you, the prospect of supply chain bottlenecks lasting longer than previously thought is an overriding concern that needs to be addressed.

Risk monitor for the week ahead

  • Politics is a major force for markets in the coming weeks. In Europe, Germany’s election on the 26th will be hugely important; new leadership after 16 years and new issues will set a new course for Germany and Europe for the next decade. In the US, there are two stimulus packages making their way through Congress, but the ‘debt ceiling’ will complicate that and becomes a serious issue in October.
  • Recent data point to longer-term supply chain bottlenecks – underscoring the need for preparation. Germany’s industrial orders are a good case study. Orders are at record highs, but output has been falling. Supply chain bottlenecks are particularly acute in key industries like car manufacturing and construction – and don’t appear likely to go away anytime soon. But as we’ve written elsewhere, there are things treasurers can do to make their supply chains more resilient.
  • The European Central Bank (ECB) meeting this week could prompt a longer-term bond yield lift-off. The ECB plans to slow its quantitative easing programme, which makes sense as inflation is higher, economic risks look less downside-heavy, and financial conditions are easier in nearly every way than late last year. We also think growth and inflation forecasts will slowly start to rise, bringing bond yields with them.
  • US jobs growth slowed in August but improvements in wages, unemployment and underemployment all point towards higher inflation and tapering. Around 235k US jobs were created in August – around half a million less than expected, reinforcing other data pointing to a Delta-driven slowdown last month. But big improvements in earnings (up 4.3% on the year), unemployment and underemployment, all looked more positive, and more inflationary, which bolsters our confidence in the quantitative easing tapering timeline we set out two weeks ago.
  • The Euro looks less vulnerable than the US dollar as growth momentum shifts in favour of Europe. In contrast to the more optimistic growth story for Europe, we have nudged down our US Q3 and Q4 economic growth forecasts from 7.5% to 3.8% and 4.3%, respectively. The clear conclusion for currencies is a more positive outlook for the Euro.

Trending with treasurers   

Initial Margin (IM) Phase 5 rules for larger swap users went live last week – underscoring the need for better threshold monitoring around uncleared derivatives

Plenty of people weren’t ready for the rule changes despite the pandemic-induced delay, but the new IM regulatory requirements for non-cleared derivatives impose initial margin requirements on in-scope entities whose non-cleared derivatives portfolio exceeds a specified amount.

Treasurers will find some respite in the short-term in the form of 'Threshold Monitoring': as long as you don't exceed €/$50 million in calculated initial margin at group level, then the IM obligations do not kick in. Click here for more on this.

Chart of the week

We’ll need to wait until next week for official August data, but retail sales figures from the British Retail Consortium (BRC), which closely track official sources, show sales growth continued to slow in August (3% year on year, from 6.4% in July). Much of this is simply a reflection of the economy returning to normal. Shifting spending patterns – away from retail goods and towards consumer services – are also at play. Equally, the figures are a timely reminder that consumer demand, while buoyant, is not obviously surging out of control and that notions of excessive domestic demand-driven inflation continue to look questionable.

UK retail sales continued to drop in August

Sources: BRC, UK Office for National Statistics (ONS)

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