Lagarde pushes back against tightening

• European Central Bank President Christine Lagarde said yesterday that tightening monetary policy now to rein in inflation could choke off the Eurozone's recovery, pushing back on calls for tighter policy. Inflation in the Eurozone is already twice its 2% target and expected to rise further later this year.  Speaking to EU lawmakers, Lagarde admitted inflation will be higher and longer than once thought but maintained it would fade next year, so policy action now risks hitting the economy just as price growth starts to moderate on its own. Lagarde affirmed that conditions for a rate hike in 2022 are "very unlikely" to be met but said she could not make a similar commitment for 2023. She noted wage growth could also accelerate but repeated that the ECB still did not see price growth lingering via second-round effects.

• In comments yesterday, Bank of England Governor Andrew Bailey said he was very uneasy about the inflation outlook and that his vote to keep interest rates on hold earlier this month, had been a very close call. He said he wanted markets to be in no doubt that the central bank would act to counter above-target inflation, this despite uncertainty about the outlook for jobs, the factor against raising rates this month. Bailey said a lack of official data about what had happened to around 1 million workers who were still on furlough when the government's jobs protection program ended on Sept. 30^th had made him want to wait rather than raise rates this month. Bailey said neither he nor other BoE officials had ever promised a November rate rise, however he had been concerned that some in financial markets doubted the BoE's willingness to increase borrowing costs to tame rising inflation.

• The Bank of Canada Governor Tiff Macklem said the central bank will not raise its benchmark interest rate until the slack in the country's economy is absorbed, which has not yet happened but is getting closer. In local newspaper comments, Macklem noted that while inflation risks have increased due to pandemic-induced demand shifts, supply disruptions and higher energy prices, the central bank continues to view those dynamics as transitory. He added that the central bank's policy framework, a flexible inflation target focused on the 2% midpoint of a 1-3% control range, means inflation will be kept under control, while supporting a full recovery. The Bank of Canada signaled last month that its first rate hike could come as soon as April 2022.

• Saudi inflation was unchanged at 0.2% m/m in October, while the annual inflation rate picked up slightly to 0.8% y/y from 0.6% in September.  On a m/m basis, higher housing and education and hospitality prices were offset by a decline in food prices last month.  Housing and utility prices have increased for two months in a row but were still down -2.2% y/y. Transport costs fell -0.5% m/m in October but were up 6.4% y/y on the back of higher oil prices. 

Today’s economic data and events

11:00 GB Average Earnings Index +Bonus (Sep) Forecast 5.60%

11:00 GB Claimant Count Change (Oct) Forecast -51.1K

17:30 US Core Retail Sales (MoM) (Oct) 0.80%

17:30 US Retail Sales (MoM) (Oct) 1.10%

Fixed Income

• US Treasuries started the week on the back foot, sliding later in the session as a decent report from the Empire Manufacturing Survey reinforced market expectations of a still robust economy grappling with high inflation. Losses were modest on the front end with 2yr UST yields up less than 1bp to 0.5117% while the 10yr UST yield added more than 5bps to 1.6042%. The 2s10s spread has bounced up from a recent low of close to 100bps and ended overnight at almost 110bps.
• European bond markets were likewise offered at the start of the week with 10yr gilts adding more than 5bps to 0.96% while bund yields rose 3bps to -0.23%.
• Emerging market bonds wavered overnight with Turkish 10yr local currency yields dipping 6bps to 18.58% while South African yields for similar tenor bonds rose 4bps. Indian 10yr government bonds rallied modestly overnight.
• Deutsche Bank and FAB have arranged a green repo transaction while a similar deal has taken place between Standard Charted and Saudi National Bank in Saudi Arabia. Green repos would be the next iteration of sustainable finance in the region after several issuers have made use of green bonds or sustainability loans.

 FX

• The dollar gained to start the week thanks to a uptick in yields later in the session on the back of good economic data out of New York state. The DXY index rose 0.29% to 95.407 with the bulk of gains coming at the expense of EURUSD which fell nearly 0.7% to 1.1368 and USDJPY added 0.2% to 114.12. GBPUSD closed broadly unchanged.
• Commodity currencies gained, though, with USDCAD falling 0.27% to 1.2516 and AUD adding 0.2% to 0.7347. NZD struggled to gain much ground, rising by less than 0.1% to 0.7048.

Equities

• There was little movement in US equities to start the week, with all three major indices closing flat for want of any major drivers in either direction. Things were only slightly more dynamic in Europe, and while the FTSE 100 closed up just 0.1%, the DAX (0.3%) and the CAC (0.5%) saw bigger moves further into record levels.
• Within the region the DFM continued its upwards trajectory with a further 2.7% gain yesterday. The index, which had lagged the ADX this year, is benefit from the announcement of a number of key companies. The ADX lost -0.3% yesterday, and the Tadawul -0.6%.

Commodities

• Oil markets reversed some early selling pressure and managed to close near enough unchanged although with a mixed performance. Brent futures settled at USD 82.05/b, down barely 0.15% while WTI added around 0.1% to USD 80.88/b. Markets still remain in anticipation of the US administration announcing whether it will release any crude from the SPR.
• Meanwhile in the region, the UAE’s energy minister, Suhail al Mazrouei, said that OPEC+ would be committed to its plan of increasing oil output by 400k b/d per month as oil market balances will shift into a surplus in 2022. His comments were echoed by Prince Abdulaziz bin Salman, minister of energy for Saudi Arabia, who said that oil inventories could increase by as early as December. Russia’s deputy energy minister also backed up the ‘go slow’ approach from OPEC+, noting that the market expected a surplus in only a few months.

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