Expectations of increasing monetary policy divergence between the Federal Reserve and the ECB drove the markets this week. Rate markets pushed back expectations of the first ECB rate hike from 2022 to 2023 after both ECB Lagarde and Schnabel said that conditions for rate increases next year would be very unlikely to be met. On the back of these comments, EUR/USD hit a 16-month low and briefly dipped below 1.13. The US-DE 10-year spread has widened by 20 basis points in November. Long-term market-based inflation expectations have stabilised just below 2% in euro area and in the range of 2.5-2.6% in the US for now. We expect euro area inflation to remain above the ECB’s target until H2 22, but fall back to a 1.5-1.7% range thereafter, see our Euro Area Research: Measuring the euro area inflation pulse,15 November.
Equity markets maintained a good spirit this week, supported by evidence that the global consumer is holding up strong. Chinese retail sales surprised on the upside on Monday with 4.9% annual growth (cons. 3.7%). After a string of worse-than-expected figures, this gave some investor relief. On Tuesday, the US (nominal) retail sales rose 1.7% in October and even when factoring in some increase in prices, this was a surprise. The strong retail sales are a reflection that the pandemic is still having an effect on consumer dynamics, as it equally indicates that goods demand remains elevated while service consumption is subdued versus pre-pandemic trends. Overall, resilience in goods consumption implies no near-term relief for global supply chain bottlenecks (longer delivery times and elevated freight rates) while it does provide some relief to fears of the global growth slowing down.
Consumption-related indicators will remain in focus next week. Euro area consumer confidence data for November will be released on Monday and it will be interesting to see whether we see a decline similar as in the US in light of high inflation pressures. So far consumer confidence has been quite resilient, still standing above pre-pandemic levels. We also get the German consumer confidence data on Thursday. In the US, the most important release is the PCE data on Wednesday. The inflation part of it is not so interesting given we already got CPI statistics two weeks ago. Instead, the monthly private consumption data is the one to watch. Considering the strong retail sales data, we could expect goods consumption to remain elevated. Also, watch out for the flash PMIs from euro area, UK and the US on Tuesday. Recently, the gap between US and euro area economic surprise indices has been growing with data releases from the US often surprising to the upside. Negative data surprises from the euro area could add further pressure on EUR/USD.
On the central bank front, we keep an eye on the FOMC minutes on Wednesday and the ECB minutes on Thursday. Several FOMC policymakers have spoken since the November meeting so we expect this to be a non-event for markets. For ECB, the focus will be on the inflation debate in the Governing Council and on any indications why Lagarde at the time was not willing to push back more on the aggressive market pricing on the short-end. Lastly, the Reserve Bank of New Zealand will meet early Wednesday morning, and consensus is looking for a 25bp hike.
