Weekly Focus – Maybe Not Quite So High for Quite So Long

The “higher for longer” narrative about interest rates was toned down in a week with little concrete news about the economy, based on recent indicators that inflation is coming down. Not least last Friday’s US labour market report pointed in that direction, with job growth in October below expectations and downward revisions of the two preceding months, hourly earnings increasing just 0.2% in October, and private sector average working hours decreasing 0.3%. During the week, we have in general seen both a declining trend in bond yields and positive sentiment in equity markets. However, central banks have been eager to say that the inflation problem should not yet be considered solved, not least Fed Chairman Jerome Powell, who sent that message on Thursday, leading to a partial reversal of the previous market moves.

Helpful for the inflation outlook, oil prices have again dropped to around USD 80 per barrel. We see this as mostly another sign of markets becoming more convinced of a cooling world economy.

As central banks around the world emphasised during the week, it is still too soon to conclude that inflation has been vanquished. Wage growth in most Western countries remains above what is consistent with 2% inflation, including the US, by other measures than the hourly earnings from the job report. In the US this week, the Senior Loan Officer Opinion Survey showed that banks are not to the same extent as earlier experiencing declining credit demand, although it is clear that financial conditions are still a drag on activity and that credit standards are still being tightened. The Reserve Bank of Australia actually hiked its rates by 25bp to 4.35% for the Cash Rate as it saw especially services inflation being more persistent than anticipated. The Polish central bank had been expected to cut rates this week, but did not do.

In China, however, deflation talk has returned to the headlines after CPI declined 0.2% y/y in October. This was driven by a 30% decline in pork prices, and we do not expect deflation to persist, but core inflation is low at 0.6% y/y and more economic stimulus is likely. Already in the coming week, there is a chance of a rate cut on Wednesday when we will also be following the meeting between Presidents Xi and Biden for signs of improvement in China-US relations. Also on Wednesday, a range of interesting Chinese data is released, not least home and retail sales.

Globally, the most important data release in the coming week will likely be US CPI where we expect energy prices to pull headline inflation lower. We see the underlying price pressure as moderate if still to the high side of the Fed’s target. However, the October number could be distorted by the auto workers’ strike leading to temporarily higher car prices and the effect from health insurance premiums.

The UK labour market report will be watched for signs of easing in the stubbornly high wage growth. Data from this week showed a stronger than expected economy with GDP unchanged in Q3 and growing 0.2% in September. In principle, it will also be important to see how the labour market more broadly is developing, but the data for employment and unemployment is currently “experimental”.

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