Afghanistan falls, worrying signs for the global economy and Fed taper debate continues.
Taliban control
There’s chaos this morning at Kabul’s international airport as thousands of people rush to leave Afghanistan by the last exit point not controlled by the Taliban. The militant group now seems to have complete control over the country, with leaders marching into the capital yesterday promising to declare a new “ Islamic Emirate of Afghanistan.” While the speed of the collapse of government came as a shock to many, the world now awaits the new rulers’ next move. The market angle on all this, if there is one, is that there is now more risk in the world, and portfolios should be adjusted as appropriate.
Worsening
China’s economy slowed more than expected in July, with retail sales, industrial production and investment in fixed assets all growing less than forecast. Unemployment also ticked higher as the country introduced new measures to control the spread of the delta variant. Supply chain disruptions in Asia may ripple across the world just as shipments would usually start to ramp up ahead of the Christmas shopping season. There is also little good news on the demand side with U.S. consumer sentiment data on Friday showing the lowest reading since 2011.
Debate
Federal Reserve Bank of Minneapolis President Neel Kashkari said that a few more strong jobs reports over the coming months would be enough for the Fed to start tapering its asset purchases. The bond market seems to have its eye on the Aug. 26-28 Jackson Hole symposium for Chair Jerome Powell to lay out the timing for the central bank’s reduction in bond buying. Both Powell and Kashkari are speaking tomorrow at separate events, so more comments about employment and the expected path for inflation are possible.
Markets drop
Events in Afghanistan, disappointing China data and the resilience of the delta variant are all curbing risk appetite. Overnight the MSCI Asia Pacific Index slipped 0.7% while Japan’s Topix index closed 1.6% lower. In Europe the Stoxx 600 Index was down 0.6% by 5:50 a.m. Eastern Time with cyclical stocks the worst performers. S&P 500 futures pointed to some red at the open, the 10-year Treasury yield was at 1.278%, oil slid and gold was lower.
Coming up...
It is a fairly quiet start to the week on the data front with only Empire manufacturing at 8:30 a.m., and TIC flow data for June at 4:00 p.m. The U.S. and South Korea hold joint military exercises today. Paysafe Ltd., and CureVac NV report earnings. Today is the last day for hedge funds to make their 13F filings.
What we've been reading
Here's what caught our eye over the weekend.
And finally, here’s what Justina’s interested in this morning
The bond market is watching two potentially contradictory stories this week. On one hand, the latest economic news is flashing some headwinds. Chinese retail sales and industrial production slowed more than expected in July. A U.S. sentiment survey released Friday plunged. Rising cases of the Covid delta variant are underscoring just how hard it is to put the pandemic behind us.
On the other, there’s speculation that between a Jerome Powell town hall today, Fed minutes Wednesday and a Jackson Hole symposium next week, we’ll hear more discussion of the central bank’s plan to taper its assets purchases.
Bonds have lately focused on the former story-line in taking a more bullish turn. The curve has largely been flattening over the past few months. Ten-year yields dropped again last week, and the bond-stock correlation is once more solidly negative. As the ING strategists point out today, it’s mostly been the belly of the Treasury curve that’s reacted to more hawkish headlines -- the 2s5s10s fly, which shows where five-year yields are relative to the two- and 10-year.
We could end up with something in between those two narratives. While a timeline for tapering will probably still send curves steeper and yields higher, the extent to which they do is also going to depend on how that changes the rate trajectory. In that regard, as Dallas Fed President Rob Kaplan said on the Odd Lots podcast earlier this month, tapering can actually be presented as a move to delay a rate increase. In other words, maybe not every taper has to elicit a tantrum.
Follow Bloomberg's Justina Lee on Twitter at @justinaknope
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