Despite weaker growth momentum, central banks across the globe seem to be opting to tighten monetary policy sooner rather than later. As widely expected, the ECB meeting on Thursday resulted in no new decisions (see our Flash: ECB Review – Confirmed: Today’s meeting was a prelude to December, 28 October). Markets, however, reacted strongly to a lack of coherence in Lagarde’s comments regarding current market pricing. We do not expect the ECB to hike rates in the foreseeable future given their transitory inflation narrative. However, should inflation prove more persistent, Thursday’s comments definitely leave more room for the ECB to turn hawkish. Also this week, the BOC took yet another shift in a more hawkish direction by ending its QE purchases and changing its forward guidance, indicating the first hike potentially as early as next April.
Equity markets kept holding up this week despite stagflation fears receiving a fresh boost from data. The closely watched German Ifo dropped to a 6-month low as global supply disruptions continue to weigh on the manufacturing sector. At the same time, the German inflation rose to 4.6% in October from 4.1% in September. US GDP growth in Q3 was also weaker than expected, (2.0% q/q AR vs 2.6% expected).
Market-based inflation expectations stabilised this week despite sustained high oil and gas prices. The ongoing energy crisis hits emerging and frontier markets at a challenging time, further undermining the external vulnerabilities of net importers. In our piece Surging commodity prices adds to emerging market vulnerabilities we note that Turkey and India could be particularly exposed as their external positions are weak to begin with.
Next week is packed with central bank meetings. The Reserve Bank of Australia kicks it off on Tuesday. We expect no changes in monetary policy, although some sort of a hawkish shift is almost given. Considering aggressive market pricing for RBA, focus will be on forward guidance. One of the highlights will be the FOMC meeting on Wednesday, where we expect the Fed to announce QE tapering, starting immediately with a pace of USD15bn per month. Risks are tilted towards a faster pace of USD20bn per month. Bank of England will meet on Wednesday with the markets pricing in a 50-60% probability of a rate hike this year. Economists are divided, but we expect no changes yet. For Norges Bank, it’s an interim meeting, hence, we believe the central bank will stick to their message of the next hike coming in December. The Polish central bank will also meet on Wednesday. We expect a 25bp hike in line with consensus but risks are tilted towards a larger hike.
EUR/USD traded range-bound most of the week before Lagarde’s apparent failure to talk down market pricing sent the pair higher on Thursday. We are still in favour of a stronger USD given increased monetary policy divergence and slower global growth.
We have a busy data calendar for next week. During the week, we will get the latest signals on the health of the Chinese economy in the form of both official and Caixin PMIs. As the global industrial cycle is turning, we pay special attention to the manufacturing sector sentiment, also the US ISM on Monday. Oil markets will keep a close eye on OPEC+ meeting next Thursday. The US October job report will crown the week on Friday. Despite supply side problems, we are slightly more optimistic about jobs growth than consensus, expecting new jobs in the range of 400-500k. Also, watch out for the G20 meeting over the weekend for any comments on how to speed up the global rollout of COVID-19 vaccines.
