Volatility increases as market digests Fed tapering, U.S. jobs numbers, central bank outlooks, and crude oil supply
Summary
The Fed solidified its tapering plans for November and December, committing to monthly reductions of $15 billion in asset purchases. Rates, FX, and commodities all saw increased volatility as the market reacted to stronger-than-expected U.S. jobs numbers, disparity in outlook between central banks, and a mixed picture on crude oil supply.
Fed tapering plans
The Fed met last week and gave some long-awaited specifics on stimulus reduction plans. The Fed committed to tapering asset purchases for November and December by $15 billion each month, down from the current rate of purchasing $120 billion in assets each month. If this pace of tapering holds steady, all new asset purchases would cease by June 2022. However, the Fed only committed to this tapering plan for November and December, reserving the right to adjust in reaction to further data on recovery, especially in the labor markets.
Rates react to tapering and jobs numbers
As expected, the Fed committed to keeping rates flat at 0-25bps. Markets have currently baked in two rate hikes next year — one in September and an additional hike by December 2022. The 10-year started last week above 1.55% and climbed to above 1.60% by mid-week. However, rates dropped well below 1.50% after a strong employment report that revealed 531,000 new jobs were created last month, significantly beating expectations of 450,000. This market reaction comes after the Fed indicated that labor market recovery would dictate the pace of tapering .
Central banks' stances drive dollar strength
The BoE, ECB, and RBA came out with more-dovish-than-expected stances on rates last week, driving strength in the direction of the dollar. The BoE opted not to increase rates by the market-expected 15bps; the RBA indicated that the market was wrong to price in a rate hike in early 2022; and the ECB gestured at rising COVID cases and hospitalizations, especially in Germany, as a detractor to recovery. These stances, contrasted against the Fed’s less-dovish stance, led to a rise in the DXY index.
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Crude oil volatility
Commodities markets continue to be volatile with an overall upward trajectory in prices. Crude oil had an especially volatile week with a mid-week dip in price attributed to higher-than-expected U.S. crude oil inventories. WTI regained some ground on Friday as OPEC+ plans to keep pace of raising oil output by 400,000 barrels per day. However, the index remained down on the week.
The week ahead
This week, all eyes are on Wednesday’s inflation data as we get year-over-year numbers for October. Market expectations are at 5.8%, which would be 0.4% higher than the prior month’s rate.
(Related insight: Register for the upcoming webinar, "Treasury 2022: Opportunities, Priorities, and Trends.")
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