The week started with rumours that Lael Brainard was interviewed for the Fed's chair when she visited the White House last week. This signalled Jerome Powell has a serious rival as these two are the only people who have publicly surfaced as being in the running. Biden will make a decision by Thanksgiving on whether to renominate Jay Powell or choose someone new.
After the blackout period prior to the FOMC decision last week ended the Fed speakers are coming out thick and fast to give their views on inflation. First out of the traps was Treasury Secretary Janet Yellen who reiterated her view that higher U.S. inflation will not continue beyond next year, however the Fed would act if it needed to dampen any 1970s-style price rises. ‘I'd expect price increases to level off, and we'll go back to inflation that's closer to the 2% that we consider normal as the pandemic fades’, Yellen said in an interview yesterday. She added that as the global pandemic eases, more people will return to work, helping consumer demand, which in turn will relieve the pressure from wages and goods prices.
Then we had Bullard saying he believed inflation issues are bigger in the U.S. than in Europe. However, the Fed is not contemplating hikes at the moment with the focus remaining on tapering. There was a caveat though ‘What we can do is assess the situation next spring and see where we're at, and at that point we can make a decision about raising the policy rate’ he said.
Daly said inflation figures were ‘eye-popping’ and she sees a lot of uncertainty around the numbers. She also touched on the labour market, saying time was needed to see through the fog, believing it will be mid-2022 before we see the true state of the labour market and as well as the outlook for inflation. ‘It's going to take time to know whether the job market is tight, as many employers say, or has room to expand by bringing people back into the workforce’ she noted.
Kashkari said prices have been elevated for longer than expected, and he doesn’t know how long supply-chain disruptions will last. He also expects more clarity on the economic outlook by the time the Fed ends its bond-buying program in mid-2022, and is keeping an ‘open mind’ on the timing of any rate hikes to follow.
Away from the US we had Germany’s ZEW economic sentiment, which rose to 31.7 in November, well above the surveyed 20 and last month's 22.7, although the current situation did come in lower than expected to 12.4, well below the expectation of 19.4.
US Consumer Price Index (CPI) figures out of the States came in much higher than expectations with an increase of 0.9% in October, the consensus had been for a rise of 0.6% with 0.4% being last month’s figure. This resulted in the year-over-year-growth rate jumping to 6.2%, the biggest rise in over 30 years, well above the market's consensus of 5.9% . The core metric, ex food and energy, advanced 0.6%, estimates were for 0.4 % whilst year-on-year it came in at 4.3%, 0.3% above estimates.
Drilling down into the figures showed that price pressures were mostly broad-based, as prices increased for food, energy and core components alike. Fuel was up 12.3% on the month, meaning it has now increased by over 59% over the past year. Energy prices overall rose 4.8% in October and are up 30% for the 12-month period. Used car prices rose 2.5%, now up over 26% for the year. Food prices also showed a sizable jump, up 0.9% and 5.3% for the year. Following the release, President Biden said in a statement that reversing inflation is now becoming his top priority, especially in the energy sector. However, he said there is ‘no question’ that the economy is in ‘better shape than it was a year ago’.
Following the CPI release treasuries were sold across the curve, with the 5-year yield up 14bp the highlight. We also saw a very weak 30-year auction, with a 5.3bp tail, due mainly to the relatively lower participation by non-dealers.
UK GDP figures for September look quite solid with activity up 0.6% during the month, however, when you strip out the way health spending is accounted for in the figures then a different picture emerges. If you subtract the effects of in-person doctor appointments and other pandemic related spending, then a moderate outlook becomes more evident. But the UK economy is still growing just not as strong as first thought with third quarter GDP disappointing at 1.3%. Will this weakness affect the BoE and its expected rate hike over the coming months, we don’t think so. A December rate hike is quite widely anticipated but it may be the jobs data which has more of a bearing. With the furlough scheme way behind us the impact of redundancy levels and underemployment could be the catalyst for a delay until February’s meeting, but early evidence is that there has been little pickup in redundancies at this juncture.
The highlight in terms of U.S. data this week is the Retail Sales report tomorrow then we have Industrial production and Capacity Utilisation, later in the week we also have Building permits and housing starts along with a few second tier releases. We also have many Fed speakers throughout the week and the auction of $23bln of 20 year notes and $14bln of 10 year Tips. In the UK we have the inflation report for October with some high numbers expected and the October Retail Sales report. While in the Eurozone we have EC Industrial Production, Employment and Q3 GDP, along with many inflation releases across the differing countries.