Economic preview: US inflation meets increasingly hawkish Fed
By Neil Dennis
10:30, 3 December 2021
The hawkish turn by Federal Reserve chairman Jerome Powell this week will undoubtedly concentrate focus on next Friday’s consumer price inflation data from investors looking for clues about the US central bank’s next move at its 16 December policy meeting.
In a busy week for data releases, eurozone economic growth will come under scrutiny from updates to third-quarter gross domestic product (GDP) on Tuesday. On Friday, the UK reports monthly GDP figures.
And on the central bank front, Australia’s Reserve Bank holds its final monetary policy meeting of the year on Tuesday.
October’s headline consumer price index (CPI) rose to an annual rate of 6.2%, its largest 12-month increase since November 1990, while core CPI – excluding food and energy – rose to 4.6%, the highest since August 1991.
Over the past few months. inflation readings, including the Fed’s favoured personal consumption expenditures measure, have increasingly tested the central bank’s notion that price pressures are “transitory”, and this week Fed chairman Jerome Powell, in a Senate committee hearing, dropped the “T” word and acknowledged that monetary tightening might have to be conducted over a quicker timescale than previously planned.
“The economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases ... perhaps a few months sooner,” he said.
While concerns over the new Omicron variant of the coronavirus have clouded market participants’ view of the Fed’s likely tightening timeline, another high CPI reading next Friday might refocus their thinking.
“US data should continue to show strong numbers over the coming weeks which will foster expectations that the Fed could turn more hawkish at the 16 December policy meeting,” said Chris Turner, global head of markets at ING.
He added: “This new Fed hawkishness muddies our view that the dollar could correct lower into year-end.”
Consensus expectations for the November CPI reading are for a dip in the annual headline inflation from 6.2% to 5.8% – possibly 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 rapidly”, it left its policy settings unchanged – as, indeed, it is widely expected to do at Tuesday’s meeting.
“But the economic data certainly suggest that policy will be tightened sooner rather than later,” said Marcel Thieliant, senior Japan, Australia and New Zealand economist at Capital Economics.
He notes that October retail sales bounced 4.9% in October, while inflation – at 3% in the September quarter – is expected to rise further as elevated shipping costs add to import prices.
The central bank has already abandoned the defence of the 0.1% yield target on its key August 2024 bond, and an announcement on asset purchase tapering – from AUD4bn per week to AUD3bn – is expected to come soon.
But not at Tuesday’s meeting. “We forecast that the RBA will press ahead with tapering its asset purchases in February and end quantitative easing by August 2022,” Thieliant concluded.
Best of the rest
Tuesday sees the publication of the latest third-quarter gross domestic product (GDP) numbers in the eurozone, but while revisions to the previous estimate of 2.2% quarterly growth are possible, investors are already looking ahead to the possible impact on growth in the current quarter of new restrictions in the region to combat the latest wave of Covid-19.
Monthly GDP data for October are published by the Office for National Statistics on Friday. In September, GDP rose by 0.6% month-on-month, thanks to growth in services output, with health and social work activity contributing most to the rise.
The October data are expected to show growth of a similar magnitude, with supply disruptions curbing output in manufacturing and production sectors.
Economic highlights 6-10 December
- Germany – factory orders October
- UK – Markit construction PMI November
- Eurozone – sentix investor confidence December
- UK – BRC like-for-like retail sales November
- China – trade balance November
- Australia – RBA interest rate decision
- Japan – leading economic index October
- UK – Halifax house prices November
- Germany – industrial production October
- Eurozone – unemployment Q3
- Eurozone – third-quarter GDP
- Eurozone/Germany – ZEW economic sentiment December
- US – trade balance October
- US – mortgage applications December
- Japan – foreign investment December
- UK – RICS house price balance November
- China – inflation CPI November
- UK – financial stability report
- Germany – current account/trade balance October
- US – jobless claims
- UK – GDP October
- UK – trade balance October
- UK – manufacturing/industrial production
- US – inflation CPI November
For all the economic data releases and central bank meetings next week, click here