14 October 2021
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US inflation stays high in September

By Khatija Haque

  • US CPI came in slightly higher than forecast at 0.4% m/m in September, faster than the August rise of 0.3% m/m, on higher food, fuel and electricity prices.  The annual inflation rate rose to 5.4% from 5.3% in August.  Core inflation (which excludes volatile food and energy prices) rose 0.2% m/m in line with expectations, up from 0.1% m/m in August.  The annual core inflation rate was unchanged at 4.0% in September.  “Reopening” related inflationary pressures are easing as expected, with the September data showing declines in airfares, hotel costs and second-hand vehicle prices. However, this was offset by higher housing costs, which account for about one-third of the CPI basket.  While higher energy prices could keep headline inflation elevated in the near-term, we expect the rate of price growth in the US to slow next year on base effects and moderating energy prices.  Supply chain disruptions are likely to last well into 2022 however.
  • The FOMC minutes from the September meeting indicate that the Fed will vote to start tapering asset purchases in November. Officials noted that near-term inflation was likely to be higher than previously forecast due to persistent supply chain disruptions, which would probably take longer to resolve than previously thought, but that uncertainty around the outlook remained high. The committee has broadly agreed on the timeline for tapering proposed by Fed staff, which suggests a monthly reduction of USD 10bn in Treasury purchases and a USD 5bn decline in mortgage backed securities. This suggests the tapering process will be concluded by mid-2022.  However some FOMC members preferred a faster taper. We think the Fed will wait to raise rates until early 2023 as the unemployment and labour force participation rates are unlikely to have reached “full employment” levels by mid-2022. However, if inflation proves stickier than expected in H1 2022 the Fed may need to prioritise its price stability mandate and bring the first rate hike forward to late 2022.
  • UK data released yesterday was mixed.  Industrial production and manufacturing output rose by much more than forecast in August (0.8% m/m and 0.5% m/m respectively) but construction output declined -0.2% m/m and GDP growth came in slower than forecast at 0.4% m/m in August, with the July reading revised down to -0.1%. With shortages of fuel and higher energy prices likely to have weighed on growth in September, the economy is likely to remain below pre-pandemic levels of GDP for a couple more months, which may deter the Bank of England from raising rates in November.
  • Turkish President Recep Tayyip Erdogan has removed three members of the TCMB’s monetary policy committee and appointed a new deputy governor for the central bank yesterday. One of the three dismissed committee members had opposed the 100bps cut to the one-week repo last month, so the move potentially paves the way for more rate cuts. The lira weakened on the back of the news.
  • UAE bank deposits grew 0.7% m/m (1.6% y/y) in August, up from 0.3% m/m and 1.5% y/y in July. Growth in non-residents’ deposits has outpaced that of residents deposits on a m/m basis since February. Bank loans grew 0.2% m/m but declined on an annual basis by -1.7% y/y. Lending to the private sector was down -1.4% y/y. 
  • The value of UAE non-oil trade with the rest of the world grew 27% y/y in H1 21 to AED 900bn. Non-oil exports grew 44% y/y to AED 170bn, and 41% higher than H1 2019 as well.  The UAE is focusing on growing the manufacturing sector over the next decade which should boost direct exports as well.

Today’s economic data and releases

08:30 JN industrial production (Aug)

16:30 US initial jobless claims (Oct 9) forecast 320k prev. 326k

16:30 US PPI (Sep) forecast 0.6% m/m prev. 0.7% m/m

Fixed Income

  • US Treasury markets extended their phase of bear flattening overnight in response to another elevated inflation print and the minutes from the September FOMC that confirmed the Fed was looking at starting its tapering of asset purchases by November. Yields on the 2yr UST added 2bps to settle at 0.3580% while the 10yr yield fell 4bps to 1.5368%.
  • Fed officials noted that inflation risks are to the upside and the market is moving faster on near-term rates in expectation that the hiking cycle could begin next year, likely immediately after asset purchases are brought to a close. Eurodollar futures markets are pricing two 25bps hikes by the end of 2022.
  • Outside of the US, developed market bond benchmarks were generally higher overnight. Yields on 10yr bunds fell 4bps to -0.129% while gilts recovered some recent losses and yields fell 6bps to 1.087%.
  • Emerging market bond markets received a bit of a reprieve overnight with yields holding steady in both Indian and Turkish 10yr bonds while South African 10yr yields fell almost 15bps to 9.72%.
  • The UAE is reportedly considering the issuance of a federal dirham-denominated bond, according to comments from Younis al Khoori, undersecretary of the UAE ministry of finance. A federal debt law came into effect in 2018 and issued its first USD-denominated federal bond last week. Individual emirates will continue to issue their own bonds parallel to federal issuances. A federal green bond is also reportedly under consideration.


  • The dollar surrendered some of its recent gains overnight with the DXY index falling 0.46% to 94.08. The elevated September inflation print and Fed minutes that confirmed a taper timeline starting later this year were likely well priced into the market and can provide some opportunity for repositioning. However, we are still looking for dollar strength into the end of 2021 and into next year.
  • EURUSD managed a gain of almost 0.6%, its strongest move since August, and settled at 1.1594. USDJPY also snapped some of its recent gains, falling 0.3% overnight to close at 113.25 while GBPUSD managed a healthy rally of 0.5% to close at 1.3659.
  • Commodity currencies moved against the greenback overnight with USDCAD falling 0.2% to close at 1.2443 while AUD added 0.39% to 0.7379 and NZD gained almost 0.5% to 0.6964.


  • Equity markets mostly edged higher yesterday, with Japan’s Nikkei a notable exception, which lost -0.3% yesterday but has rebounded with a 1.0% gain so far this morning. The Shanghai Composite added 0.4% yesterday but is currently trading down -0.2%, while Indian equity markets ended yesterday higher as the Sensex gained 0.9%. Hong Kong is shut today for a public holiday.
  • European equity markets started weakly but generally closed up. The FTSE 100 added 0.2%, the DAX 0.7% and the CAC 0.8%. Italy’s FTSE MIB lost -0.1% however.
  • In the US, the Dow Jones closed flat while the S&P 500 (0.3%) and the NASDAQ (0.7%) both ended the day higher. All three indices remain off the levels they were at a month ago.


  • Oil prices ticked lower overnight but didn’t derail much of their recent surge. Brent futures fell 0.29% to USD 83.18/b while WTI sank 0.25% to USD 80.44/b. The API reported another weekly build in US crude inventories of 5.2m bbl last week although that was offset by health draws in gasoline and distillate products. Official EIA data will be released later this evening.
  • The EIA published its short-term energy outlook overnight and revised its forecast for 2022 US supply growth higher to 710k b/d to 11.73m b/d. Expectations for 2021 were revised slightly lower to 11m b/d. Elsewhere OPEC’s monthly oil market report revised its demand expectations for 2021 downward, helping to affirm the OPEC+ decision to keep production increases on a moderate path. OPEC revised its demand growth estimate for 2021 down to 5.8m b/d from almost 6m b/d previously.

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Written By

Khatija Haque Head of Research & Chief Economist

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