13 December 2021
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Inflation soars in November

By Edward Bell

  • Consumer prices in the US rose by their fastest pace in nearly 40 years in November as the CPI index increased by 6.8% y/y and 0.8% m/m. Higher energy prices were a primary contributor to the price growth but core inflation—which strips out volatile measures like energy and food—demonstrated broad based increases. In particular, housing costs, including rent, expanded by 0.4% m/m. Energy prices have begun to turn lower since November which should help to moderate upcoming inflation prints. Nevertheless, we would expect commentary from the Federal Reserve at this week’s FOMC to focus squarely on inflation and the high price may prompt discussion of an earlier tightening of policy than we currently expect.
  • Elsewhere in the US consumer confidence rose in December according to a survey from the University of Michigan. However, at 70.4 the University of Michigan Consumer Confidence index remains relatively low. A drop in gasoline prices in recent weeks is likely helping to provide some relief to consumers even as they endure the effects of broad-based inflation pressures. However, consumers still appear optimistic about future conditions of the US economy, particularly as the employment market remains robust.
  • Data from the UK showed that the economy there expanded by just 0.1% m/m in October, ahead of news of the Omicron variant of Covid-19. The slow growth in the run up to new restrictions to try and control the spread of the virus, the so-called ‘Plan B’ strategy, would suggest that UK economy is limping into the end of the year and may give the Bank of England further pause at its MPC meeting later this week.
  • The Emirate of Sharjah has announced it will adopt a three-day weekend, giving public sector workers Friday off in addition to the Saturday-Sunday weekend announced for federal government institutions last week. Work days for the rest of the week will be lengthened while the additional full day off is an effort to increase productivity during the rest of the week.
  • Saudi Arabia has forecast a budget surplus equivalent to 2.5% of GDP in 2022 (after a projected -2.7% this year), which would be the first surplus since oil prices declined in 2014. For 2021, revenues have exceeded budget projections at SAR 930bn compared with SAR 849 bn after the rise in oil prices and an easing back of production curbs, while expenditure has been in line with expectations. The Saudi Arabian government plans to cut expenditure by around 6% to SAR 955bn in 2022.

Today’s Economic Data and Events

  • 11:00 TU Industrial production y/y October: forecast 8.6%
  • 16:00 IN CPI y/y November: forecast 5.1%

Fixed Income

  • US Treasuries dropped last week as markets responded to the elevated November inflation print and moderated their concern over the risks the Omicron variant of Covid-19 poses to growth. A broad index of US Treasuries fell almost 1% last week, erasing the last two weeks of gains.
  • In the run up to this week’s FOMC the UST curve has also flattened considerably from where it was only as recently as November. The 2yr UST yield added almost 7bps last week to close out at 0.6543% while the 10yr UST recovered sharply from the last week, up 14bps to 1.4837% although much of that represents some normalization after the disappointing NFP report for November shocked markets on December 3 rd.
  • Elsewhere European bond markets managed a modest gain on the week though there was divergence by country. Bund yields rose by almost 5bps on the shorter end, with 2yr bund yields closing at -0.702% while the 10yr bund yield rose 4bps to -0.349%. In the UK, however, yields fell as the market discounts the odds of the Bank of England hiking rates later this week as slow growth and the spread of Omicron weigh on the near-term outlook.
  • Emerging markets showed a highly mixed performance last week. An index of USD-denominated EM bonds managed gains of almost 0.4% as risk attitudes improved. In local currency markets Turkish bonds extended their sell-off with yields on 10yr Turkish government bonds up almost 18bps to 20.445%. South African bonds rallied with yields falling 14bps to 9.928% while Indian bonds were flat at 6.369%.
  • S&P revised their outlook on Turkey’s sovereign rating to negative from stable in light of the volatility the Turkish lira currently demonstrates and high inflation in the economy.


  • After a choppy week of trading where the impact of Omicron moved markets up and down, the DXY dollar index closed nearly unchanged last week. The DXY fell less than 0.05% to settle at 96.097, mirroring moves in EURUSD which closed out the week at 1.1313 ahead of this week’s Fed and ECB meetings. USDJPY saw much wider moves, up 0.6% last week at 113.44 as markets reengaged with risk assets.
  • GBPUSD managed to gain, up 0.3% to 1.3273, even as the government has introduced some measure of Covid restrictions and the odds of a BoE rate hike later this week diminish. Commodity currency saw the most pronounced gains, however, with USDCAD falling 0.9% to 1.2722, AUD rising more than 2.4% to 0.7172 and NZD gaining almost 0.7% to 0.6796.


  • With US CPI inflation having come in in line with expectations, US equities secured gains on Friday, with all three benchmark indices closing higher. This was the culmination of a week of much more risk-on appetite as concerns around the Omicron variant dissipated, leading to w/w gains of 3.6% for the NASDAQ, 3.8% for the S&P 500 and 4.0% for the Dow Jones.
  • With risk-off tone to the fore prior to the inflation print’s release, markets elsewhere in the world largely closed lower on Friday, but this was not sufficient to derail the gains seen over the previous days of the week. In Asia, the Shanghai Composite gained 1.6% w/w, the Nikkei 1.5% and the Sensex 1.9%. France’s CAC was the primary gainer in Europe, ending the week 3.3% higher, while the UK’s FTSE 100 added 2.4%.
  • Within the region, UAE indices continued to post robust gains on the back of listings announcements, regulatory changes and a constructive economic backdrop. The DFM added 5.0% w/w and the ADX 3.9%. Gains were less pronounced in Saudi Arabia where the Tadawul added 0.5%, while Egypt’s EGX30 added 1.9% w/w.
  • Emirates Central Cooling Systems, or Empower, is the latest Dubai entity set to be listed according to the Dubai Media Office.


  • Oil prices managed to recover some ground over the course of last week with Brent futures rising by 7.5% to USD 75.15/b and WTI adding more than 8% to close at 71.67/b as the market expects a more moderate impact from the Omicron variant. That said, time spreads have weakened substantially from around USD 1/b in the front month Brent spreads at the end of November to less than USD 0.25/b as of the end of last week. Markets may not be expecting Omicron to severely damage demand but nor do they appear to price in considerable tightness either.
  • The IEA will deliver its oil market report later this week with a focus on how they view Omicron affecting the demand recovery. There are already indications of disruption to travel, particularly in Europe, but a more aggressive response to controlling the virus in Asia could prove more troublesome for oil markets.
  • Gold prices extended their losses last week, down marginally but a fourth week in a row of declines. Spot gold closed at USD 1,782/troy oz with downside risk in play ahead of the FOMC. An indication of tighter policy sooner than expected could encourage more unwinding of gold positions which are down around 1% since the end of Q3 and more than 8% since the start of the year. Risk of faster policy normalization from the Fed could open gold to a re-test of USD 1,750/troy oz.

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Written By

Edward Bell Head of Market Economics

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