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Inflation To Stay Higher For Longer


Markets, for now, conclude that the new corona wave will probably only have a modest impact on growth. With inflation to stay higher for longer, policy normalization will have to come anyway. In the US, in the UK but even also in Europe. EMU PMI’s beat consensus, both for the headline manufacturing index (58.6) and the services measure (56.6). Admittedly, details indicated that supply delays and persistent high prices complicate the future outlook for growth. The conclusion remains that inflation and factors that are nursing inflation are also the main risk to growth. This has consequences for monetary policy. In this respect, ECB Schnabel, Villeroy, and Knot indicated that asset purchases beyond the end of PEPP in March might be less exuberant than some in the market hoped for. European yields succeeded a nice rebound. The German 2y yield rose 1.2 bps. The 10y & 30y added about 8 bps. The rise was fully due to a rise in real yields. US Treasuries this time slightly outperformed with the 5y adding 2.25 bps and the 30y up 6.5 bps. The 7y US auction was much better accepted that the 2y and 5y on Monday, and eased pressure on the Treasury market. US equities finally also entered calmer waters. The Dow and S&P closed in positive territory. The Nasdaq lost 0.5%. European equities were hit harder with losses of mostly about 1%+. The dollar rally slowed, but there was no clear sign of a trend reversal yet. DXY closed little changed at 96.5. USD/JPY (115.14) finished at the highest level since march 2017. EUR/USD tried to move away from the 1.1230 area, but gains remain unconvincing (close 1.125). CE currencies with low real yields struggled with the forint and the zloty again setting all-time/multi-year lows. EUR/GBP also gained modestly, closing at 84.08.

Asian equities are trading mixed this morning. US yields are taking a breather after the recent rise and so does the dollar (DXY 96.5). The eco calendar contains German Ifo confidence, US jobless claims, durable orders, spending and income data (including the closely watched PCE deflators) and FOMC Minutes. PCE deflators are expected to rise further (5.1% Y/Y headline, 4.3 Y/Y core). This shouldn’t come as a big surprise. Markets will also keep a close eye at the internal debate on the pace of tapering. The US 10y yield is gradually nearing 1.7% resistance. In EMU, 0.1% proved strong support for the 10y EMU swap rate. A sustained return above 0.22% would call off the ST alert. The technical picture for EUR/USD and EUR/GBP remains fragile. There is no sign of a U-turn in sentiment yet.

News headlines

The RBNZ raised policy rates as expected from 0.5% to 0.75%. Though wary of the Covid’s impact on the economy, the RBNZ expects it to be mainly short-term. As restrictions ease, the economy should continue to recover. Growth was revised downwardly for the FY year ending March 2022 but significantly raised for 2023. Meanwhile, rising capacity pressures, supply disruptions and labour market tightness keep inflation elevated. CPI is seen higher at 5.7% in FY 2022 before easing to 2.1% into 2024. The RBNZ adjusts the expected policy rate path, penciling in a tightening pace that would end up with an average OCR of 2% in FY 2023. This means a minimum of 25 bps rate hikes at every meeting next year. The RBNZ will decide early next year on how to reduce bond holdings. Despite the hawkish tone, NZD/USD loses ground this morning, slipping from 0.695 to 0.691. The kiwi dollar hoped for a bolder 50 bps move. Gouvernor Orr said it was discussed, but judged that incremental 25 bps are appropriate for now.

Sweden’s Finance Minister Andersson is set to become the country’s first female PM. She secured a deal with the ex-communist Left Part that said it would block the nomination. In Sweden, the PM does not need the backing from a majority in parliament but must avoid a majority voting against. Andersson replaced former Lofven as leader of the Social Democrats earlier this year. Lofven also stepped down as PM on November 10th, saying it is important to have a smooth handover of power before the general elections of September next year. The Swedish crown trades stoic around EUR/SEK 10.17 this morning after a sharp losing streak since early November.


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