US inflation meets increasingly hawkish Fed

Federal Reserve Chairman Jerome Powell’s hawkish turn this week will undoubtedly focus on next Friday’s consumer price inflation data from investors looking for clues about the US central bank’s next move on of its political meeting on December 16.

In a busy week for data releases, economic growth in the eurozone will be closely scrutinized by third quarter gross domestic product (GDP) updates on Tuesday. The UK releases monthly GDP figures on Friday.

And on the central bank side, the Australian Reserve Bank is holding its last monetary policy meeting of the year on Tuesday.

American inflation

The October Consumer Price Index (CPI) reached an annual rate of 6.2%, its largest 12-month increase since November 1990, while the core CPI – excluding food and energy – rose reached 4.6%, the highest since August 1991.

In recent months, readings of inflation, including the Fed’s preferred personal consumption expenditure measure, have increasingly tested the central bank’s notion that price pressures are “transient.” , and this week, Fed Chairman Jerome Powell at a Senate committee hearing dropped the “T” and acknowledged that monetary tightening may have to be carried out on a faster-than-expected time scale.

“The economy is very strong and inflationary pressures are high and it is therefore appropriate, in my opinion, to consider concluding the reduction in our asset purchases … perhaps a few months earlier,” he said. he declares.

As concerns over the new Omicron variant of the coronavirus have clouded the opinion of market participants about the likely tightening of the Fed’s schedule, another high CPI reading next Friday could refocus their thinking.

“US data is expected to continue showing strong numbers over the next few weeks, which will fuel expectations that the Fed may become more hawkish at the December 16 policy meeting,” said Chris Turner, global head of markets at ING.

He added: “This new hawkishness from the Fed clouds our view that the dollar could correct lower until the end of the year.”

Consensus expectations for the November CPI reading are for annual headline inflation to drop from 6.2% to 5.8% – perhaps a relief for the Fed, but still uncomfortably high.

RBA rate decision

While the RBA, in its November statement, noted that the economy is “recovering quickly,” it has left its policy parameters unchanged – as, in fact, it is expected to do when Tuesday’s meeting.

“But the economic data certainly suggests that policy will be tightened sooner rather than later,” said Marcel Thieliant, senior economist for Japan, Australia and New Zealand at Capital Economics.

It notes that October retail sales rebounded 4.9% in October, while inflation – to 3% in the September quarter – is expected to rise further as high shipping costs add to import price.

The central bank has already dropped the defense of the 0.1% yield target on its key August 2024 bond, and an announcement on reducing asset purchases – from AUD 4 billion per week to AUD 3 billion – should arrive soon.

But not at Tuesday’s meeting. “We expect the RBA to continue reducing its asset purchases in February and end quantitative easing by August 2022,” Thieliant concluded.

The best of the rest

Tuesday sees the release of the latest third-quarter GDP figures in the euro area, but while revisions to the previous estimate of 2.2% quarterly growth are possible, investors are already anticipating the possible impact on growth over of the current quarter of new restrictions in the region to combat the latest wave of Covid-19.

Monthly GDP data for October is released Friday by the Office for National Statistics. In September, GDP grew 0.6% month-on-month, thanks to growth in the output of services, with health and social work activity contributing the most to the increase.

Data for October is expected to show growth of a similar magnitude, with supply disruptions reducing output in the manufacturing and production sectors.

Economic highlights 6-10 December

On Monday

  • Germany – October factory orders
  • United Kingdom – Markit construction PMI November
  • Eurozone – Sentix December investor confidence

Tuesday

  • UK – BRC November Comparable Retail Sales
  • China – November trade balance
  • Australia – RBA Interest Rate Decision
  • Japan – leading economic index October
  • United Kingdom – House prices in Halifax November
  • Germany – industrial production October
  • Euro zone – unemployment Q3
  • Euro area – third quarter GDP
  • Eurozone / Germany – ZEW economic sentiment December
  • United States – October trade balance

Wednesday

  • United States – December mortgage applications
  • Japan – foreign investment December

Thursday

  • United Kingdom – RICS house price balance November
  • China – CPI inflation November
  • United Kingdom – Financial Stability Report
  • Germany – current account / trade balance October
  • United States – unemployment benefit claims

Friday

  • United Kingdom – GDP October
  • United Kingdom – October trade balance
  • United Kingdom – manufacturing / industrial production
  • United States – CPI inflation November

For all economic data releases and central bank meetings next week, click here

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