Inflation, our old friend

All in all, last week was unremarkable, so the focus has remained on the inflation debate. Specifically, the Biden administration is under pressure to release stock from the Strategic Petroleum Reserve, leading to a fall back in crude oil prices while gold and Bitcoin rally.

Chinese data points for Industrial Production and Retail Sales came out better than expected this morning, buoying sentiment about the economy’s growth prospects. Unfortunately, under the surface, the housing crisis tied to the Evergrande scandal continues to point towards large-scale domestic issues. Some of the more fantastical news headlines suggest imminent collapse, and even conservative sources don’t deny a deepening of the issue. Numerous articles came out over the weekend, including this one from the Financial Times, explaining how under-investment in business is driving housing affordability concerns across the western world.

Bottom line: We’re watching the continuing Chinese property market saga and several central bank speakers this week. There’s a fundamental argument yet to be had on the central banker’s myopia of house prices as a significant contributor to inflation and erosion of disposable income. It’s unlikely central banks can check this growth directly, but their lack of acknowledgement of this issue is counterproductive and harms their credibility. The collective refrain has been ‘inflation is transitory’, but it should have an asterisk that says, ‘except for housing which is on a 2007-esque tier’.

The week ahead
 

GBP 

Cable continued to move lower last week, as high US Consumer Price Index data added to pressure on the Pound following the Bank of England surprising markets at the start of the month by deciding not to raise interest rates. The pair has managed to recover from year-to-date lows and is holding just above the $1.34 handle in early trade. The outlook for Sterling is a mixed one, with economists divided on the likelihood of an interest rate hike by the BoE in December as any softer labour market data would likely delay the decision to February next year. A more immediate risk is the emergence of renewed Brexit tensions and the possibility of the UK triggering Article 16. This could see the re-introduction of tariffs on goods, which could place downside pressure on the Pound as EU-UK relations take a hit.

  • The Rightmove House Price Index m/m fell 0.6% over the last month despite a 1.8% gain previously.
  • The UK’s Unemployment Rate stat will be released this Tuesday with expectations of a 10 basis-point fall to 4.4% in September versus 4.5% in August.
  • UK CPI and Core CPI figures are projected to print at 3.8% and 3.1%, respectively, in October, after readings of 3.1% and 2.9% in September.
  • UK Retail Sales m/m data to be released this Friday for October is forecast to come in at 0.5%, following a figure of -0.2% in September.
  • BoE Monetary Policy Committee member Huw Pill will speak at 12:00PM this Friday.

 

EUR

The Euro closed at its lowest levels against the US Dollar since the summer of 2020 last week, as high inflation and a dovish European Central Bank continue to pressure the pair. Members of the ECB have persisted in downplaying expectations of a rate rise next year, despite inflation in the Euro Area hitting a 13-year high. It’s expected that the bank’s 2.0% inflation rate target will be met over the medium-term, making the December meeting—which will see updated growth and inflation forecasts—all the more important. Coronavirus cases have rebounded on the continent, with Germany, Austria, and the Netherlands all experiencing record levels of case numbers. From today, Austria has imposed restrictions on unvaccinated individuals that are expected to last for ten days.

  • European Central Bank President Christine Lagarde will speak this Tuesday at 4:10PM and on Friday at 6:00PM.
  • Eurozone final CPI and Core CPI y/y is expected to remain unchanged at 4.1% and 2.1%, respectively, in the month of October.
  • The German Producer Price Index m/m reading is forecast to climb 1.4% in October, following a 2.3% climb in September. This suggests that the rate at which input costs are translating into price hikes has slowed in October.
  • German Bundesbank President Jens Weidmann will speak at the Frankfurt European Banking Congress this Friday at 1:00PM.

 

USD

The US Dollar Index extended its gains last week, climbing to the $95 handle—levels last seen in July 2020—as traders bet on the Federal Reserve hiking interest rates twice by the end of 2022. Consumer sentiment in the US hit a 10-year low as rising prices threaten to take a bite out of spending power. Americans are also reportedly feeling let down by the Biden administration as no effective policies have been deployed to combat the surge of inflation. Labour market conditions also seem to be worsening, with 4.4 million Americans quitting their jobs in September despite record-high job openings. As a result, Joe Biden’s approval ratings have plunged, with just 39% of voters approving of the government’s handling of the economy. A number of Federal Open Market Committee members are due to speak this week; all eyes will be focused on any comments regarding the recent CPI print, with Retail Sales data also expected to be in the crosshairs.

  • US Retail and Core Retail Sales m/m are expected to print at 1.2% and 1.0%, respectively, for the month of October compared to readings of 0.7% and 0.8% in September.
  • Industrial Production m/m looks set to move 0.9% higher in October, following a -1.3% reading in September.
  • Unemployment Claims for the week ending the 13th of November are forecast to come in at 260K, down from 267K in the week ending the 6th.
  • This week will see Federal Open Market Committee members speaking throughout, with the Treasury Currency Report expected at the end of the week.

 

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