Week Ahead – Interest Rates Are Rising

Fed and BoE to fight back against high inflation 

Central banks have provided unprecedented amounts of stimulus over the last decade and took that to another level during the pandemic as the world went into lockdown. Now the pandemic has entered a different phase that policymakers hoped wouldn’t happen and have spent months telling us wouldn’t last. Inflation has arrived and it’s making central banks very nervous.

While most broadly agree that price pressures are primarily being driven by supply-side disruptions that will ease over time, they are also becoming increasingly uncomfortable with their magnitude and duration. The longer high inflation persists, the more likely it is to become ingrained, at which point central banks have a real problem on their hands.

Some central banks have already pushed ahead with tightening monetary policy and the Fed and BoE aren’t far behind. The US central bank is expected to announce a tapering of its asset purchases on Wednesday, paving the way for a rate hike later next year, while the BoE may take the leap on Thursday, with markets pricing in many more next year. Rock bottom interest rates are a thing of the past.

US

The Fed will announce ‘mission accomplished’ on reaching “substantial further progress” on both inflation and employment mandates.  Wall Street widely expects the Fed to formally announce it is ready to start tapering its asset purchases and now the debate shifts to how soon it will signal it is ready to raise interest rates.  Financial markets are pricing in two rate hikes by the Fed next year, largely because inflation pressures are not easing up anytime soon.

Another key event for the week will be the October nonfarm payroll report.  The US economy is expected to get back on track as 425,000 jobs are filled, and the unemployment rate ticks lower to 4.7%.  For the Fed’s blessing on interest rate hikes, the unemployment rate needs to be lower than 4.3% and inflation will need to remain high.

EU 

Despite Christine Lagarde’s best efforts, the markets were not buying what she had to sell which could be extremely problematic for the central bank going forward. Yields have been rising since the meeting on Thursday and that pressure could intensify in the coming weeks.

It’s not often that markets will totally disregard the views of central bank heads and that will be a concern for the ECB. As well as laying the groundwork for alternative asset purchases to replace the PEPP program from March at the next meeting in December, we should also prepare for policymakers stepping up their PR offensive as they try to get investors back on board.

That may be easier said than done in this environment. It doesn’t seem to be that investors don’t believe the central bank, rather they fundamentally disagree with their views on inflation. Unfortunately for Lagarde and her colleagues – and most other central banks – they’ve been very wrong in recent months so there is reason to disagree again. Next weeks data is mostly low to medium impact including final PMIs, unemployment and retail sales.

UK

The Bank of England looks likely to begin its post-pandemic tightening cycle next week as it attempts to quickly get to grips with the inflation problem in the country that Chancellor Rishi Sunak alluded to during the budget this week. Inflation is expected to peak above 5% and persist throughout next year averaging around 4%.

Markets appear to be pricing in a 15 basis point hike at the moment so there is scope for some upside surprise if the Bank leads with 25 basis point rises in the early months of the cycle. Markets are pricing in at least a full percentage point of hikes by the end of next year so whether it does 15 or 25 probably doesn’t make much difference in the longer run.

The quarterly monetary policy report will be released alongside the announcement which should provide further insight on inflation expectations at the BoE and what that means for interest rates. Given how the markets responded to the ECB this week, it will be interesting to see how seriously they take this.

Russia

The Central Bank of Russia will release its monetary policy report on Monday, coming only a couple of weeks after it raised rates more than expected in order to combat higher inflation and warning more could follow this year. Inflation is expected to remain close to double its target this year which will require further action.

South Africa

Local government elections take place on Monday, with a number of ANC seats reportedly at risk.

Turkey

The sell-off in the lira has slowed over the last week or so but remains at risk of significant further downside. It stabilised just shy of 10 to the dollar and if that’s overcome, the move could accelerate. CBRT Governor claimed that a weak lira as a result of the central bank’s policies could fix the current account deficit problem and stabilise naturally, suggesting they must seize the opportunity presented by the pandemic. Not the words of someone that’s going to backtrack any time soon.

Inflation data next week could make for interesting reading. Then again, the central bank is clearly not concerning itself with that anymore so perhaps not.

China

Evergrande has paid its latest offshore bond coupon, once again, one date before the end of the grace period. That has calmed Mainland markets into the end of this week, as has the continued taking down of coal prices by China’s state planner. USD/CNY remains steady with no sign of a weakening bias by the PBOC, which instead, has been doing large liquidity injections into the local markets.

Next week sees Caixin Manufacturing and Services PMIs released with Manufacturing of most interest. A fall back under 50.0 will see China slowdown nerves increase again and will be bearish for equities. That said, authorities are unlikely to allow stock markets or property sector woes to get out of hand before the Central Committee meeting starting the 8th.

India

India will have a shortened week with the Diwali holidays falling on Thursday and Friday. A slow week for data with the highlight being Markit Services and Manufacturing PMIs which should show the economy continues to recover after the last delta wave. India’s Balance of Trade could show stress on the import side as the cost of imported energy skyrockets and Northern India struggles with power blackouts. A rally in oil next week will be a headwind for local equites.

The INR recovery continues, but the story is more a weak US Dollar one than a strong Rupee one. Its fate will be decided by the market reaction to the latest FOMC meeting in the mid-week.

Australia & New Zealand

Australian markets are in for a stormy start with the RBA’s credibility and yield control in serious trouble. Hawkish noises are increasing and the benchmark 3-year CGB yield has shot up to 0.75% in the past two days, well above the RBA 0.10% target. If the RBA does not show up on Monday to aggressively buy bonds, markets will price in a change of monetary stance and the sell-off in Australian equities will deepen. The RBA will release its latest policy decision on Tuesday with markets on a knife edge for a change of stance. Either way, the RBA has a big job on its hands now and will likely have to intervene in bond markets repeatedly next week. All of this should be good for the AUD though. It is likely to overshadow the Retail Sales and trade data at the back end of the week.

RBNZ Governor Orr has said that global interest rates have now bottomed, including in New Zealand. Kiwi should be a lot higher, but delta cases have now appeared in the South Island as well as the greater Auckland area. A deterioration over the weekend will weigh on Kiwi and local equity markets. The effects should be temporary though as markets are laser focused on a 0.50% RBNZ hike this month. NZ Employment and Labour Costs on Wednesday will go a long way to confirming that outcome.

Japan

Japanese markets could be choppy on Monday morning after the elections to be held this Sunday. Only a defeat of the ruling LDP, highly unlikely, is likely to have a material impact on Japanese markets. Jibun Services PMI and Household spending at the end of the week will be of onl passing interest.

USD/JPY has fallen this week, but that is because of a weaker US Dollar story elsewhere that the cross has coattailed. USD/JPY remains at the mercy of the US and Japan 10-year rate differential. If the FOMC, as expected, announces the start of QE tapering, USD/JPY should resume its rally with renewed momentum.

Key Economic Events

Saturday, Oct. 30

• G-20 Summit begins

Sunday, Oct. 31

Economic Data/Events

• China Oct manufacturing PMI: 49.7e v 49.6 prior; non-manufacturing PMI: 53.0e v 53.2 prior
• Japan general election for its 465-seat lower house of parliament
• COP26 starts in Glasgow.

Monday, Nov. 1

Economic Data/Events

• US Oct ISM Manufacturing: 60.3e v 61.1 prior, construction spending
• Eurozone manufacturing PMI
• Germany manufacturing PMI
• UK manufacturing PMI
• Australia manufacturing PMI, CoreLogic house prices, inflation gauge, home loans value
• India manufacturing PMI
• Thailand manufacturing PMI, business sentiment index
• New Zealand CoreLogic house prices
• China Caixin manufacturing PMI
• Japan vehicle sales, PMI

Tuesday, Nov. 2

Economic Data/Events

• RBA rate decision: Expected to keep both Cash Rate Target and 3-year yield target unchanged at 0.10%
• Australia consumer confidence
• ECB Enria to speak at Finnish Financial Supervisory Authority seminar on EU financial markets
• New Zealand building permits
• Switzerland CPI
• Singapore PMI, electronics sector index
• Japan monetary base
• Hong Kong retail sales
• US light vehicle sales
• South Africa manufacturing PMI

Wednesday, Nov. 3

Economic Data/Events

• FOMC Rate Decision: expected to announce it will begin tapering its asset purchases
• US factory orders, US durable goods
• Poland Rate decision:  Expected to raise base rate by 25bps to 0.75%
• Australia building approvals, Markit PMI services and composite, private sector houses
• Singapore PMI
• South Africa PMI
• Japan composite and services PMI
• India Markit PMI composite and services
• Eurozone Markit services PMI, unemployment
• New Zealand Unemployment
• China Caixin composite and services PMI
• Russia CPI
• Spain unemployment
• UK Nationwide house prices
• EIA Crude Oil Inventory Report

Thursday, Nov. 4

• ECB President Lagarde speaks at the Women in Economics conference.
• ECB’s Governing Council member Holzmann speaks at a conference in Vienna.
• Fed’s Quarles, BOE Deputy Governor Cunliffe speak on a panel at a conference organized by Portuguese securities regulator CMVM.

Economic Data/Events

• BOE Rate Decision: Could raise bank rate for the first time since pandemic. Analysts are leaning towards no change, but several are calling for a 15bps increase.
• Norges Rate Decision: Expected to keep deposit rate unchanged at 0.25%
• Czech Rate Decision: Expected to raise repurchase rate by 50 bps to 2.00%
• US trade, initial jobless claims
• Eurozone PPI
• Germany factory orders
• New Zealand ANZ commodity prices
• Australia trade
• Thailand consumer confidence
• OPEC+ meeting on output

Friday, Nov. 5

• China International Import Expo (CIIE) begins six-day event
• BOE’s Ramsden and Pill deliver a Monetary Policy Report National Agency briefing.
• BOE’s Tenreyro appears as a panelist at the IMF 2021 Jacques Polak Annual Research Conference.

Economic Data/Events

• US October Change in nonfarm payrolls: 400Ke v 194K prior; Unemployment Rate: 4.7%e v 4.8% prior
• Canada unemployment
• Eurozone retail sales
• Germany Industrial production
• Japan household spending
• Thailand CPI, foreign reserves, forward contracts
• China BoP
• Singapore retail sales
• Australia RBA statement on monetary policy, foreign reserves
• Spain industrial production
• South Africa gross and net reserves

Sovereign Rating Updates

• France (Fitch)
• Denmark (Moody’s)
• Italy (Moody’s)
• Saudi Arabia (Moody’s)