Market Watch 07.11.2021

Federal Reserve Says Tapering Set to Begin Mid-November. On Wednesday at the latest FOMC meeting the Fed announced the start of scaling back its massive $120bn monthly bond purchasing programme. The decision comes after other central banks announce the tightening of their monetary policy, such as the Bank of Canada and the Reserve Bank of Australia. After months of speculation and debate regarding rising inflation and supporting the economy, the FOMC believes now is the time to reduce its stimulus “because the economy has achieved substantial further progress toward our goals” of 2% inflation and maximum employment.


The plan is to reduce its purchases of agency mortgage-backed securities by $5bn a month and its Treasury securities by $10bn a month, in line with market expectations. The tapering should begin in mid-November and end in June 2022. However, this may change as the Fed committee is “prepared to adjust the pace” of tapering “if warranted by changes in the economic outlook”. Fed chair, Jerome Powell, said tapering might “speed up or slow down” but promises to be very transparent if that is the case and will not shock the markets. Following the announcement, Treasury prices slipped and stocks climbed to record highs with the S&P 500, the Nasdaq and the Russell 2000 climbing 0.6%, 1% and 1.9% respectfully.


The BoE Shocks Markets After Keeping Rates Unchanged. Last month Bank of England governor Andrew Bailey, said the BoE “will have to act” following rising inflation. The BoE had predicted inflation to reach 5% by next spring, well above the 2% target. This fuelled market expectations of an immediate rate rise. However, on Thursday Bailey announced they decided to hold off a rise for now. Bailey said the Monetary Policy Committee based previous inflation rises on market interest rates but is now interested in different predictions that do not warrant an immediate rate hike.


Furthermore, the delay comes from weaker than expected GDP in the third and fourth quarters of 2021 from supply chain bottlenecks and inflation reducing disposable income. Waiting until the December meeting also allows the MPC to see if the furlough scheme ending in September led to significant job losses. Bailey said a change in the labour market is “crucial” in determining the speed and size of interest rate rises. Following the news, the pound fell by 0.8% against the dollar to $1.358 and the UK two-year bond yield fell to 0.62%. Traders are betting the rate rise to 0.25% will now happen at the December meeting.


OPEC+ Rejects U.S. Request for More Crude. U.S. President Joe Biden has asked for higher OPEC+ production following calls from large consumers. However, Saudi Arabia and more have denied the request because COVID-19 outbreaks continue its threat against the market. Instead, they will stick with the planned December output hike of 400,000 barrels per day. Saudi energy minister, Prince Abdulaziz bin Salman said “What we have seen over the past few months again and again and again is that energy markets must be regulated otherwise things will go astray.” Head of oil and gas research at JPMorgan, Christyan Malek said, “Saudi Arabia needs to fund its own energy transition. And it’s looking for an oil price and a relationship which is conducive for that.”


The global energy crisis has caused petrol to reach the highest level in 7 years and Crude’s recently rally to 2014 highs. President Joe Biden blames the surge on Russian and Saudi Arabian oil supply restraints. The U.S. is calling out for a stabilisation of prices, because the White House believes the shortage risks jeopardising global economic recovery. Jennifer Granholm, US energy secretary, is prepared to utilise “all tools necessary”, including using crude oil from the government’s strategic petroleum reserve. This week WTI Crude oil fell 3.2% to $81.29 and Brent Crude oil fell 0.7% to $82.62.



Economic Calendar 8th November – 12th November


MONDAY

  • Data: Japan Current Account

  • Events: Eurogroup Meeting, BCB Focus Market Readout


TUESDAY

  • Data: German ZEW Economic Sentiment, US PPI, German Trade Balance

  • Events: EcoFin Meeting, BoC Governor Macklem Speech, US WASDE Report


WEDNESDAY

  • Data: CNY CPI, US CPI (MoM), US Initial Jobless Claims, US Crude Oil Inventories, German CPI

  • Events: -


THURSDAY

  • Data: Australia Employment Change and Rate, UK GDP (QoQ)(Q3), China Industrial Production (YoY), UK Manufacturing Production

  • Events: ECB Economic Bulletin and Forecast


FRIDAY

  • Data: Michigan Consumer Sentiment Index, US JOLTS Job Openings (Sep), China Unemployment Rate, France and Spain CPI

  • Events: EcoFin Meeting


Main Events


  • US CORE CPI

On Wednesday, the most recent iteration of the US Consumer Price index will be released, measuring the change in the price for goods and services. As tapering in the US has already been initiated by the Fed through the announcement of a reduction in asset purchases, this figure is likely to remain unaffected the month of October. The most recent CPI reading recorded an 0.2% expansion and the forecast for the upcoming announcement is 0.3%. Inflation pressure has been a major macroeconomic issue in the last months, pushing the equity market higher after a positive momentum from the earning season. For these reasons, the prediction of a higher CPI reading is justified and is likely to continue into the following months until tapering takes full effect.


  • UK Gross Domestic Product

On Thursday, the UK Gross Domestic Product will be announced. This figure will shade a new perspective on the inflation adjusted output of goods and services produced in the country. The previous figure was recorded at 5.5%, outperforming the market expectations of 4.8%. This quarter however, forecasts are significantly lower, expecting a reading of 1.5%, caused by the supply shortages and inflation pressure. As inflation is expected to increase above 4%, the Bank of England will closely monitor the GDP reading along with the labour market data to decide on the future monetary policy of the country.



Thank you to Cameron Barker, George Fol and Mihai Golumbeanu for your in-depth analysis!

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