Markets
Strong ADP US job growth (+571k) and an impressively strong services ISM (66.7)understandably only caused a mild rise in USD yields and the dollar as investors awaited the Fed policy announcement. The Fed as expected gave the go ahead to start tapering bond purchases by $15bn/m from this month ($10bn Treasuries; $5bn MBS). At the same time, Chair Powell reiterated that the Fed is not at the point yet to consider raising interest rates. The drivers of inflation are more persistent than expected, but the Fed still can afford to be patient. Most of the supply issues behind the current rise of inflation are still seen abating next year and there is a way to go to reach the goal of maximum employment (which, by the way, isn’t that easy to measure). At first sight, yesterday’s Fed stance can be labeled as some kind of ‘soft tapering’. We see it as more neutral as Powell didn’t aggressively push back on current market expectations for rate hikes next year. In this respect, the Fed chair sees a chance for the employment goal to be reached in the second half of next year. On markets, expectations for two rate hikes next year didn’t change. The Fed giving more weight to employment than to the inflation caused the US curve to steepen (2y +0.6 bps, 30y +6.1 bps) mainly due to higher inflation expectations. German yields were little changed except for the 30y (-2.9 bps). The dollar suffered a mild setback with DXY closing below 94 (93.85) and EUR/USD closing at 1.1612, but this morning’s price action suggests no lasting damage for the US currency. Equity markets were happy with the gradual approach. The Dow, S&P and the Nasdaq all succeeded record closes.
Today’s eco calendar includes the weekly US jobless claims, EMU PPI and a long list of ECB speakers, but the focus will turn to other central bank policy decisions. The Norges Bank is expected to take a pause after its September hike. The Czech national Bank will continue its anti-inflation crusade, with consensus anticipating a 75 bps rate hike. At the Bank of England, it will probably be a close call whether it will raise rates (from 0.1% 0.25%) already this month. We slightly prefer a scenario of a delay till December. This might be mildly negative for sterling short-term, but any sustained EUR/GBP upside is probably hampered by persistent euro softness. This is also the case for EUR/USD. The dollar maintains interest rate support even after yesterday’s balanced Fed-message. EUR/USD 1.1530 is intermediate support ahead of the key 1.1495 area. On European interest rate markets, we look out whether yesterday’s post-Fed raise in US yields will help a bottoming process. The 0.17% area for the 10y EMU swap should hold to prevent a weakening of the ST technical picture.
News headlines
The Polish central bank (NBP) raised policy rates with a bigger-than-expected 75 bps hike after a surprise 40 bps hike last month. The reference rate now stands at 1.25%. Contrary to Central-European peers, Poland has long shunned higher rates but is catching up as inflation is searing. Prices rose 6.8% y/y in October and are expected to increase further to 7%+ early next year. Governor Glapinski said the hike was necessary to avoid second-round effects, adding that another one in December was more likely than not. The NBP expects yearly inflation to be well above the midpoint target of 2.5% across the policy horizon (2021-2023). Growth this year is seen at 4.9-5.8%, 3.8-5.9% in 2022 and 3.8-6.1% in 2023. The policy statement doesn’t mention the NBP will keep buying government bonds. Glapinski later cleared out that they have “practically ended” QE. The rallied yesterday from EUR/PLN 4.61 to 4.58.
Russian inflation surged further October. Headline CPI quickened 1.11% m/m to 8.13% y/y – the fastest pace since 2016. Food prices jumped 10.1% amid a weather-delayed harvest. Core measures however also rose with 0.85% m/m to be at a yearly 8.03%, also a 5-year high. Unabating inflation, even after a total of 325 bps rate increases, opens the door for the central bank of Russia to go big once again. Governor Nabiullina flagged the possibility at the previous meeting of a 100 bps rate hike. That would bring the policy rate at 8.5%, the highest level since 2017. The Russian ruble lost ground yesterday to EUR/RUB 83.46 though the move occurred already before the inflation release.
