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Week Ahead: Central Banks, US Politics, and An Impending Energy Crisis?

With end of month and end of quarter behind us, we may see some money put to work after the Dow Jones sold off -1,516.81 points in September, the most points (not percentage) since the March 2020 selloff of -3,492.20 at the beginning of the coronavirus pandemic. Will traders buy the dip?  The RBA and RBNZ also meet this week.  Will either be raising rates?  In addition, after kicking the can down the road until December 3rd for a government shutdown, Congress now must deal with the impending debt ceiling and a vote on the infrastructure bill. Will the debt ceiling be lifted before October 18th?  OPEC+ meets on Monday amid a potential energy crisis.  Will they increase supply?  Economic data this week will also bring about US Non-Farm Payrolls and Canada’s Employment Change!

Central Banks

Both the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) meet this week. At RBA’s last meeting, despite the continued shutdowns from the Delta variant of the coronavirus, the RBA tapered as promised, from A$5 billion a week to A$4 billion a week.  However, given the economic effects of the recent bout of the virus, they also said they expect growth to slow and unemployment to rise.  Therefore, they will keep bond purchases at the current pace until at least mid-February 2022.

On the other hand, the RBNZ is expected to hike 25 bps at their meeting this week, becoming only the second central bank in the developed world to raise rates (Norges Bank raised rates last week) from 0.25% to 0.50%.  New Zealand’s central bank was all set to hike at their August meeting, however snap lockdowns from a coronavirus breakout caused them to delay the hike until October. After the stronger than expected Q2 GDP reading, some even speculated the RBNZ may hike 50bps, however central bank speakers quickly squashed that speculation.

US Politics

Last week, Congress averted a potential financial crisis by extending funding for the US from September 30th until early December.  By kicking the can down the road, this allows Congress to address other potential financial issues, such as raising the debt ceiling.  Treasury Secretary Janet Yellen said she expects the US to run out of money on October 18th.  Although Republican Senate Minority Leader Mitch McConnell told Democrats they’ll have to “go it alone” via the reconciliation process, Democrats are reluctant to do so.  Their reasoning: Both parties have run up the spending bill.  Democrats don’t want to be viewed as the only ones responsible for raising the debt ceiling.  This is sure to be an ugly, down to the wire fight between Republicans and Democrats.

There is another ugly fight currently ongoing.  However, this is in-house fighting among Democrats regarding President Biden’s $3.5 billion social welfare package.  Some Democrats want to vote for the infrastructure, such as road, bridges, and tunnels.  These Senators are seeking a smaller package for social issues, such as the one proposed by Senators Machin and Sinema, which is only worth $1.5 trillion.  Republicans are completely united against both bills, so Democrats will have to come to an agreement in order to pass the package.  There may be a vote this weekend.

Energy Crisis?

Last week, the UK saw lines at the pumps of 20 cars deep due to supply shortages and bottlenecks.  The government said there is plenty of fuel at the UK refineries.  The problem is they can’t get enough drivers to deliver the fuel to petrol stations.  Recently, the government said they are seeing the first signs of a demand decrease.  However, the Petrol Retailers Association said that although a number of fuel stations were still dry, that number is smaller than the 37% recorded on Tuesday last week.  They have not seen a decrease in demand though.  The UK has issued short term visas for truck drivers and has the help of the Army to help deliver fuel.

But is this just the beginning?  WTI Crude Oil was up over 9.5% last week, reaching as high as 76.67, while Brent Crude was up a similar amount, reaching a high of 80.06 last week.  In China, there have been rolling power cuts, forcing factories to shut down or reduce output. (This will further add to supply chain issues).  Why?  Higher demand for electricity, record high coal prices, and government price controls.  In addition, Europe has been hit with high natural gas prices and power prices.  As the weather gets colder throughout Europe and the colder states of the US during winter, prices are expected to climb even higher.  Watch this week and throughout the rest of the year to see if markets can reign in prices as we approach colder months in the northern hemisphere. OPEC meets on Monday.  Will it be too soon for them to raise output or will they wait to see more of the effects of the power crunch to determine whether more oil is needed?

Economic Data

The big economic events this week are the OPEC+ meeting, the RBA meeting, and the RBNZ meeting, however the big economic data of the week are US Non-Farm Payrolls and the Canadian Employment Change on Friday.  While Fed Chairman Powell said, “We are all but there” in terms of meeting employment goals for the Fed to taper, if September’s print is low, will that change his opinion?  Powell noted that 750,000 has been the average over the last 3 months.&nb