Risk appetite rebounds

We start the week in a fairly quiet fashion, with final manufacturing PMIs for July released across a range of European countries. The most important release of today is the US ISM manufacturing index. Signs of easing supply chain bottlenecks and inflationary cost pressures remain the key focus.

Also in Norway we get the monthly manufacturing PMI release. However, ahead of the release we emphasize that this summer print for July historically has been very volatile sending misleading signals at several occasions.

Later this week the key events will be the Bank of England meeting on Thursday and not least Friday's US nonfarm payrolls report as the FOMC has clearly stated that job growth is a key determinant for the policy outlook. Analyst expectations are set just south of 1M new nonfarm payrolls.

Markets: After a sour end to last week risk-sentiment is rebounding somewhat this morning. Most major Asian equity indices are trading in green and US/European equity futures are up by roughly ½ percent at the time of writing. Treasury yields are little changed yet precious metals still enjoy the support from last week's drop in real yields. Oil is trading slightly on the back foot with the front Brent contract back below USD 75/bbl.

US debt ceiling: After a two year suspension the US debt ceiling is now officially back in place this August. The debt ceiling determines the total amount of debt that the federal government is authorized to borrow and without another suspension or increase of the limit the US government will have to rely on extraordinary measures to finance its deficit. These measures are likely exhausted in October or November which increases the pressure on US politicians to find a solution amid ongoing negotiations of infrastructure and other spending plans (more below). In the very near-term a bipartisan deal on the debt ceiling seems unlikely. However, we still expect a deal as we get closer to the exhaustion of the extraordinary measures as nobody are interested in a US default. In the near-term we expect market impact to be limited but highlight the potential markets challenges this autumn of tighter USD liquidity conditions when Fed starts its tapering and a solution is found to the debt ceiling. For more information please see Research US - no re-suspension of the debt limit near-term but expect a deal eventually, 28 July.

Infrastructure bill: In the US the senate has finished the legislature text of a USD 550bn infrastructure package - the largest infrastructure spending plan in decades. According to senate majority leader Schumer the senate will vote on the package “in a matter of days”. That said, the bill is set to be fully passed in Congress only via the reconciliation procedure (to avoid Republican filibustering) when the House of Representatives return in September. As this procedure also includes a broader budget framework on spending and tax increases, which has yet to be finalised, we are likely still months away from a Congressional vote.

FI: 10Y German government bond yields continue their slow decline amid speculations that the rising infections from the delta-variant of the Coronavirus will slow the economic recovery. Furthermore, given the support from ECB through QE purchases at an elevated pace, the 2Y German government bond yield is close to -80bp, which has been a kind of a “floor” in recent years apart from the periods like the pandemic escalation last year

FX: After a Fed induced relief rally to reflation sensitive currencies Friday marked a reversal to USD strength and Scandi/commodity FX weakness. EUR/USD moved back below 1.19 while both EUR/NOK and EUR/NOK erased Thursday's losses. Moves have been very modest this morning.

Credit: CDS indices followed equities in red on Friday. iTraxx Xover closed 3½bp wider (in 236bp) and Main ½bp wider (in 46½bp). Cash bonds fared better, with HY some ½bp tighter and IG marginally tighter.