After the flurry of central bank meetings and strong US jobs report last week (see US Labour Market Monitor – Stronger jobs report but participation remains subdued), markets calmed down somewhat at the start of this week. However, another strong upside surprise in US October CPI inflation (printing at 6.2%, highest since 1990) turned the tables, highlighting the risk that inflation will be more persistent than expected by the Federal Reserve and thus raising the probability of a faster tightening of monetary policy (see Global Inflation Watch – Highest US wage growth in more than 10 years). The market response was clear with a jump in global bond yields and equities selling off. Markets have now priced in three 25bp Fed hikes in 2022, which pushed EUR/USD below the 1.15 level amid broad USD strengthening. Spill-overs were also seen in European fixed income markets, with higher yields and spread widening between EU-Core and periphery government bonds. US Brent oil moved back above USD85 per barrel after the US administration signalled it will refrain from releasing strategic reserves to the market.
A string of Chinese data released during the weak, continued to paint a mixed picture. On the back of booming (US) goods demand, exports beat expectations in October. Producer price inflation jumped more than expected to a 26-year high, but CPI inflation at 1.5% also remained comfortably below the PBOC’s 3% inflation target. The credit impulse has turned higher, but strains in Chinese property markets linger, with stress spreading to investment grade bonds and the Chinese off-shore USD high-yield index reaching a new record high. Media reported that the government is mulling steps to ease bond issuance rules for developers and preparing capital injections from banks and institutional investors. German ZEW economic expectations surprised on the upside in November, rising for the first time since May, while inflation expectations continued to ease. It will be interesting to see whether November PMI figures show a similar pattern, after clouds have darkened over to the euro area macro outlook of late (see Euro Area Macro Monitor – Darkening clouds on the horizon).
Next week’s key release will be the US retail sales which have continued to surprise on the upside in recent months. Elevated US goods consumption remains an important driver behind the global supply chain pressures and Tuesday’s figures will reveal whether goods spending has started to weaken in October on the back of high inflation. A range of Fed speakers will also be keenly watched by the market for monetary policy hints. In the euro area, final HICP figures will reveal more details about the trend in underlying inflation pressures, after core inflation surged to the highest level since 2002 in October. In China, we expect Monday’s retail sales and industrial production figures for October to be on the soft side, given disruptions from power shortages and another Covid-19 wave. Given the Bank of England’s renewed focus on labour market outcomes to determine the hiking cycle, the UK jobs report on Tuesday (as well as the CPI figures on Wednesday) will also be of interest. US President Joe Biden and Chinese President Xi Jinping are scheduled to hold a virtual summit next week. In Japan, new PM Kishida will reveal a new stimulus package to kick-start the recovery. In Australia the central bank will keep a close eye on Q3 wage inflation data, a key indicator for Reserve Bank of Australia’s transitory inflation view, and a low print could push back on market’s aggressive rate hike pricing.
