GLOBAL CREDIT BULLETS | Monday, 8th November 2021

Fed – taper on
Last Wednesday, the Fed announced the beginning of QE tapering, as largely anticipated. Purchases will be reduced by $15bn/month starting in November. Two thirds of the reduction will take place in Treasury bonds. Total purchases ($120bn/month) are planned to be fully tapered by mid 2022. Communication about hikes, on the other side, went better than expected. Powell recognized inflation is less transitory than previously expected, and declared the Fed is ready to lift off shall the inflation path change abruptly. Still, he avoided challenging market pricing, effectively postponing a more detailed discussion about the timing of hikes to the December meeting, when the new dot plot will be published. Powell also gave a bullish signal on the economy, pointing to very strong demand dynamics. Into the meeting, US and global rates have tightening, easing the concerns prevailing last week about a premature hiking cycle. The rates market now prices a little more than one hike over the next twelve months. Current communication suggests the Fed is ready to act if inflation gets out of control, but can manage without hiking for another few months. We maintain the view that inflation is more persistent than central banks think, and job market data keep printing strong (as last Friday NFP confirm). We thus see moves lower in rates as opportunities to hedge further in 2022.

BoE – no time for hikes
The Bank of England surprised markets by keeping rates on hold at its November meeting. After recent inflation strength, consensus expected anywhere between one and two hikes. The statement sounded quite comfortable about inflation dynamics, posing further emphasis on the transitory nature of inflation and providing a loose guidance on “chances of hikes over the next few months”. Quantitative tightening was not a focus in the meeting, and will probably be announced no earlier than mid-2022. Rates tightened aggressively after the meeting, with the market now challenging chances of a December hike. The BoE decision marks a sudden shift in the bank’s tone, without any change in the underlying trends. In fact, CPI is running at 3% and RPI almost at 5%, with unemployment now firmly below 5%. A dovish turn at the current juncture thus risks undermining the central bank’s credibility. We maintain a bearish view on GBP and long end rates, as policy stance remains inappropriate for the level of inflation.

OPEC – keep it tight
At its November meeting, the OPEC+ refrained from hiking production further. Into year-end, the cartel has confirmed previous guidance of a moderate hike by 400k bpd. The production increase is small, especially considering the almost 5m bpd spare capacity of the cartel. Global oil demand has now caught up with supply, and the market is essentially on balance, vs a deficit of 10m bpd on average in 2020 (20m at the bottom). The economic ground for keeping supply tight has thus faded, and more pressure could arise on the cartel to increase production in the coming months. This is particularly true for Saudi Arabia, which represents 40% of the spare capacity and is benefiting the most from the currently tight markets, as record profits of Aramco show. Political pressure from the US in the coming months seem key. We keep a bullish view on oil and commodity, as tight market and supply bottlenecks accompany stronger demand amid growth rebound.