It’s been a fairly quiet week in financial markets with equities slightly lower, bond yields flat on the week and the USD strengthening a bit. The ECB meeting turned out to be a bit of a non-event with the ECB broadly meeting consensus expectations of signalling a moderate reduction in asset purchases. The inflation projection was revised slightly higher, but with core inflation in 2023 seen at 1.5% (previously 1.4%) there is still some way up to 2% in the medium term.
The Fed’s decision on tapering of asset purchases is still looming but the timing was thrown into renewed uncertainty after the weak US employment report last week. Views expressed by Fed members this week was a mixed bag but points to a delay. Bullard and Kaplan still favours a tapering announcement on the Fed meeting this month while Bostic and Willams prefer a delay due to the weaker data lately. They still look for tapering to begin this year, though. As Williams is vice Chairman and close to Fed Chairman Powell it indicates that we will not get a tapering announcement on the next Fed meeting. We still expect tapering to begin this year and to be done around the middle of 2022.
‘Stagflation’ fears have been on the rise lately as economic data has increasingly dissapointed while inflation concerns persist as freight rates have continued higher, labour shortages are widespread in many countries and bottle necks in manufacturing and ports delay delivery of consumer goods. The delta variant continues to challenge many big Asian countries with a big share of manufacturing such as Malaysia and Vietnam. Whether this ‘stagflationary’ scenario is more persistent will depend a lot on whether more people that left the labour force during the past year returns to the labour market and whether inflation expectations remain anchored. This week we sent out Big Picture -Delta delayed recovery, in which we downgraded our global growth forecasts. The balance of risk to our growth outlook is to the downside, while supply side problems could lead to more persistent inflation problems stoking more stagflation concerns. This week the German ZEW expectations index showed another drop highlighting that economic sentiment is coming down from the recent high levels.
In China, the leadership tried to calm fears over the recent crackdown within certain sectors. An op-ed on the front page of People’s Daily highlighted that recent regulation aims at supporting the private economy and was targeting a level playing field by cracking down on violations of laws such as abusive market power. The op-ed follows comments by China’s economic tsar Liu He, who on Monday vowed that “policies for supporting the private economy have not changed… and will not change in the future”.
In the coming week focus turns to the US again. Retail sales will give more information on how much goods consumption is slowing as the effect of the stimulus checks fade. Very strong US goods consumption is a key driver behind the global manufacturing overheating and pressure on global freight. US CPI inflation and regional business surveys will also be very interesting. In the euro area focus will be on ECB speakers, final inflation numbers for August (which provide more details) and German election polls. China releases data on industrial production and retail sales, which have disappointed lately.