Markets
Fed Chair Powell went off-script in yesterday’s testimony before the Senate Committee. Monday’s pre-released official statement kept close to the official policy line, but his interaction with lawmakers delivered some fireworks. First and foremost, Powell thinks it’s probably a good time to retire the word “transitory” when it comes to higher inflation. Even though prices are still expected to significantly fall back, it’s the case that pricing increases have spread much more broadly in recent months. In a mea culpa, he said that the Fed missed the highly unusual, very difficult, very non-linear supply-side problems in forecasting inflation developments throughout the Covid-pandemic. Second, the balance of risks clearly shifted in Powell’s view. The risk of higher inflation has increased with fallout effects on the labour market. “To get back to the kind of great labour market we had before the pandemic, we’re going to need… price stability”. At the previous policy meeting, the Fed defended its gradual normalization approach in order for the maximum employment goal to be reached. The timing of this new risk assessment is especially significant as it coincides with the outbreak of the potentially dangerous Covid-mutant Omicron. Finally, Powell translated his new inflation view and associated risks into backing a faster taper process, echoing the hawkish views of some of his colleagues. “The economy is very strong and inflationary pressures are high, and it is therefore appropriate to consider wrapping up the taper of our asset purchases perhaps a few months sooner.” We argued before that the Fed could double its monthly taper efforts from January onwards ($30bn instead of $15bn), implying a potential first rate hike as early as March instead of June.
Powell’s comments marked the start of an intraday turnaround in a session dominated by risk aversion after Moderna CEO Bancel warned for a drop in vaccines’ effectiveness against the Omicron-variant. The front end of the US yield curve obviously underperformed. The curve flattened in a daily perspective with yield changes ranging between +8.2 bps (2-yr) and -6.3 bps (30-yr). The German yield curve flattened as well with yields ending 1.3 bps higher at the 2-yr and 7.8 bps lower at the 30-yr. Consensus-beating record high EMU (core) CPI prints didn’t prompt a significant market reaction during the risk-off sentiment. Powell’s U-turn on inflation nevertheless adds ever more pressure on the ECB to prepare/present exit plans at the Dec 16 meeting. Markets over the past months stopped anticipating on any such move. The dollar erased losses, but the greenback’s performance, in the end, remained disappointing. EUR/USD spiked lower from 1.1380 to 1.1240 to eventually close around 1.1340. US stock markets received a double whammy (Omicron & hawkish Powell) and lost 1.5% to 2%. Today’s eco calendar contains US manufacturing ISM and ADP employment, but it seems that the die has been cast for the Dec 15 Fed meeting.
News headlines
Australian GDP fell less than expected in Q3 (-1.9% Q/Q; +3.9% Y/Y). Lockdowns weighed on activity. The setback was mainly due to a 4.8% drop in private consumption, with services spending taking the biggest hit (-5.8%). Government spending and net expect contributed positively. Inventories were a drag. The inability to spend raised the household savings rate to 19.8% in Q3, up from 11.2%. This provides a good starting point for a Q4 rebound as lockdowns are lifted. Corelogic’s index of capital city home prices rose a further 1.1% M/M to 21.3% Y/Y. Yields for 2-y and 3-y Australian government bonds rose 4 and 6 bps respectively. Markets see a first-rate hike by the Summer of next year even as the RBA continues to signal no rate hike at least until 2023. AUD/USD rebounds to 0.716.
Polish inflation remained stubbornly high in November at 1.1% M/M and a 20-yr high 7.7% Y/Y (from 6.8% Y/Y), drifting further away from the NBP’s 2.5% (+- 1%) inflation target. The data add pressure on the NBP to accelerate policy normalization. Policy maker Gatnar suggested that a 50 bps rate hike at each of the next two meetings might be needed. He sees risks of inflation printing above 8% in December and considers the weak zloty to be no longer in line with economic fundamentals. The zloty extended a gradual comeback, closing near EUR/PLN 4.66.
