Central bankers try to talk down inflation

Shady Elborno - Head of Macro Strategy
Published Date: 30 September 2021

 

  • Fed Chair Jerome Powell said Wednesday that resolving "tension" between high inflation and still-elevated unemployment is the most urgent issue facing the Federal Reserve right now. The United States is more than 5 million jobs short of where it was before the pandemic. Powell referred to the possible conflict between the Fed's two goals of stable prices and full employment, a situation that could force the Fed to make trade-offs between the two by raising interest rates to tame prices at a time when it still wants to encourage job growth. Thus the current high inflation, if it persists, could force the Fed to begin to tighten monetary policy before they deliver on a promise to reach maximum employment. At the Fed's most recent meeting policymakers lifted their inflation forecasts for this year to 4.2%, more than double the targeted level of 2%, before they see that pace easing in 2022 to 2.2%.
  • The US National Association of Realtors (NAR) said the Pending Home Sales Index, based on signed contracts, jumped 8.1% m/m last month to 119.5, marking the highest reading since January and followed two straight months of declines. In a sign that more expensive homes are also sidelining some first-time buyers from the market, the NAR reported last week that the share of first-time buyers was the smallest in more than 2-1/2 years in August. In a separate report, the Mortgage Bankers Association said applications for loans to buy a home fell 1.2% w/w. Loan purchase applications were down 12% y/y. According to the MBA, mortgage rates across all loan types increased since last Wednesday's announcement by the Fed, as the benchmark 30-year fixed rate reached its highest level since early July.
  • The European Commission's economic sentiment indicator rose to 117.8 in September, from 117.6 in August, after hitting an all-time high of 119.0 in July. Optimism among consumers and the industry and construction sectors boosted the readings. The data showed sentiment in industry improved to 14.1 from 13.8 in August, though it did decline in services to 15.1 from 16.8. Consumers became more optimistic, with a reading of -4.0, up from -5.3 in August. While in the construction sector the indicator rose to 7.5 from 5.5, helping offset the decline in the retail sector to 1.3 from 4.6. Price expectations among manufacturers rose to 38.2 points, a record high, while consumer inflation expectations rose to 33.1 from 31.1 in August, close to the 38.7 record from August 2001.
  • Saudi Arabia’s central bank (SAMA) extended the Deferred Payment Program for an additional three months until the end of this year for small and medium businesses that continue to be affected by COVID-19-related restrictions, the central bank said in a statemen. Since its launch in March last year the program has been applied to over 100,000 contracts with a total value of SAR 174bn in deferred payments, according to the Central Bank.

Today’s Economic Data and Events

  • 10:00 GB GDP (QoQ) (Q2) Forecast 4.8%
  • 10:00 GB GDP (YoY) (Q2) Forecast 22.2%
  • 11:55 EU German Unemployment Change (Sep) Forecast -33K    
  • 16:30 US GDP (QoQ) (Q2) Forecast 6.6%                
  • 16:30 US Initial Jobless Claims Forecast 335K                                      

Fixed Income

  • A parade of central banker stuck to the transitory inflation narrative at a conference overnight with Jerome Powell of the Fed noting that the “current inflation spike” will come to an end with Christine Lagarde from the ECB backing up that view. Yields trended lower for much of the day with the 2yr UST ending the day at 0.2892%, a drop of 1bps. Yields on the 10yr oscillated throughout the day but bonds did manage to tick up and yields closed down 2bps to 1.5167%.
  • Risk assets generally received some post-sell off support overnight with emerging market bonds catching a modest bid. Turkish 10yr bonds gained modestly while South African bonds dipped marginally.

FX

  • Risk assets generally received a boost overnight but currency markets clearly missed the message. The dollar was bid much higher with the DXY index adding 0.61% to 94.338. The ‘transitory’ message from the ECB, BoJ and BoE leadership also helped to add the downward pressure on FX pairs with the dollar: EURUSD fell 0.74% to 1.1596, GBPUSD fell 0.77% to 1.3425 while USDJPY added 0.4% to 111.94.
  • Commodity currencies likewise failed to get any relief rally with USDCAD up 0.54% at 1.2752, AUD down 0.8% at 0.7174 and NZD dropping the most, down almost 1.3% to 0.6864.

Equities

  • Equity markets globally were bid higher with strong gains in European markets in particular. The FTSE added more than 1% while the DAX gained 0.77%. In the US gains were a bit more muted as markets kept an eye on the budget standoff: the Dow rosed 0.26% and the S&P added 0.16% while the NASDAQ sank another 0.24%.
  • In early trading today Asian markets are mixed. The Nikkei is off slightly as the market there adjusts to new political leadership while the Hang Seng is falling by more than 1.2%.

Commodities

  • Oil prices fell a second day running overnight with Brent sinking 0.57% to USD 78.64/b while WTI fell 0.6% to USD 74.83/b. the EIA reported a build in commercial stocks of more than 4.5m bbl last week along with modest gains in gasoline and diesel inventories. That represents the first weekly build in crude stocks since the end of July. Production also humped by 500k b/d to 11.1m b/d, nearing pre-Hurricane Ida levels.
  • Industrial metals were broadly lower with the LMEX index of base metals down by more than 1%.

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