Never-ending Hikes

The Federal Reserve and the Bank of England are all but certain to deliver jumbo 75-basis point rate hikes on Wednesday and Thursday, respectively, as the battle against sky-high inflation continues. However, with investors now on the lookout for signs that aggressive monetary tightening could start to slow, today’s Eurozone inflation report and Friday’s U.S. jobs report for October will be in the spotlight.

GBP: The Bank of England looks set to raise interest rates by 75-basis points on Thursday; its eighth consecutive rate increase as it battles inflation currently running above 10%. Expectations for a full percentage-point rate hike were trimmed back last week after new Chancellor of the Exchequer Jeremy Hunt reversed almost all of former Prime Minister Liz Truss’s planned tax cuts and shortened her energy cap program to six months from two years. However, the delay of the first budget plan of the new government until Nov. 17th will make it harder for the BoE to spell out its economic forecasts. Furthermore, after delays caused by recent financial market turmoil, the BoE is also due to start selling bonds from its stimulus stockpile on Tuesday.

EUR: The Eurozone is set to release its flash inflation estimate for October today which is expected to come in at a record high of 10.2%. In fact, in a move to anticipate the extremely high reading, last Thursday the European Central Bank delivered its second 75-basis point rate hike in a row. Furthermore, subsequent remarks by policymakers indicated that it would continue tightening in the coming months in order to prevent inflation from becoming entrenched, despite fears over a looming recession. The euro area is also to release preliminary GDP figures for the third quarter, which are expected to show a small expansion, but most economists anticipate the bloc’s economy to enter contraction territory in the fourth quarter.

USD: The Fed is widely expected to raise interest rates by 75-basis points for a fourth straight time at the conclusion of its two-day policy meeting on Wednesday. Investors instead will be looking to Fed Chairman Jerome Powell for any hints that the future pace of hikes could slow after recent softer economic data. Financial markets are currently pricing in a smaller 50-basis point rate hike at the Fed’s December meeting and another 50-basis points over the first two meetings of next year. However, betting on a less hawkish Fed has been a risky strategy so far this year. Stocks have repeatedly rebounded from lows amid hopes for a so-called “Fed pivot”, only to be pressured lower again by persistently high inflation and aggressive monetary tightening. For now, the tone of Wednesday’s Fed press-conference and Friday’s October U.S. nonfarm payrolls report will likely be key in helping investors set expectations ahead of the central bank’s December meeting.

Calm or Calamity?

GBP: Last week’s reports that the British government is preparing to do a major U-turn on planned tax cuts have helped ease fears over public finances. In fact, Kwarteng was dismissed by Truss on Friday as she tried to salvage a premiership that is less than two months old by reinstating a planned increase in corporate income tax that Kwarteng had scrapped. However, the Gilt market had continued to sell off, after Truss stood by most of Kwarteng’s other measures. Nonetheless, new British finance minister Jeremy Hunt will announce tax and spending measures later today – two weeks earlier than previously scheduled – after the original economic plan put forward by Prime Minister Liz Truss and former Chancellor Kwasi Kwarteng roiled financial markets. Additionally, British government bonds will resume trading without the support of the Bank of England’s emergency bond-buying program, which ended last Friday. That said, any stock market gains are likely to be limited as investors continue to survey the deteriorating economic outlook, as well as a continuation of tightening monetary policies around the world. Furthermore, investors will also be looking at Wednesday’s U.K. inflation data for September, which is expected to hit double digits amid a cost-of-living squeeze while retail sales figures on Friday are expected to point to a decline in consumer spending.

EUR: European stock markets are expected to open marginally higher, helped by plans from the U.K. government to shore up confidence in its fiscal policies after weeks of turmoil. Looking forward, the economic data slate is largely empty, but Italian consumer prices are expected to remain elevated in September, climbing 8.9% on the year. Many analysts expect this to add further pressure on the European Central Bank to continue hiking interest rates. Ultimately, ECB policymakers Luis de Guindos and Philip Lane are set to speak at different events later today, and their comments will be studied for clues of future moves.

USD: In the wake of last week’s hotter-than-expected U.S. inflation data, focus will turn to the housing market with reports due on building permits, housing starts and existing home sales. The economic calendar also includes reports on industrial production, manufacturing index, and initial jobless claims. Regional Fed presidents Neel Kashkari, Charles Evans and James Bullard are also due to make what will be closely watched appearances. Ultimately, Bullard said last week’s CPI figures showed that inflation had become “pernicious” and left the door open to 75-basis point rate hikes at the Fed’s upcoming meetings in November and December but added that it was too early to make that call.

Waves of Economic Data

As global investors have repeatedly had their hopes dashed by the Federal Reserve for a pivot away from an aggressive rate hike campaign, many market participants will be keenly awaiting the latest U.S. inflation numbers this Thursday for further guidance on upcoming rate hikes.

Wednesday’s minutes of the latest Fed meeting should offer some insights into how officials view the economy and the inflation outlook. Comments during the week by several Fed policymakers will also be closely watched. Elsewhere, big bank earnings on Friday are expected to show the impact of rising interest rates and market volatility, whereas oil prices remain in the spotlight after OPEC+ announced its largest supply cut since 2020 and in the U.K. a barrage of economic data seems set to test the recovery in sterling.

GBP: The Bank of England’s Financial Policy Committee is set to publish meeting minutes on Wednesday. The committee oversaw last month’s emergency intervention to stabilize bond markets after the government’s “mini-budget”, and the minutes may give some insight into the risks facing pension funds and the implications of sharply higher mortgage rates. The U.K. is also set to publish employment data for August on Tuesday, followed a day later by GDP figures for August along with data on industrial output and the trade balance. Weak economic data could add to pressure on the government to deliver longer-term growth plans. Ultimately, investors are betting on the BoE hiking interest rates by a full percentage point at its next meeting in November to tackle an inflation rate currently touching 10%.

EUR: ECB member and Bank of France head Francois Villeroy de Galhau announced this morning that the European Central Bank is engaged in bringing down inflation to 2% percent in “two to three years” from now. He reiterated that “close to 2%” was still the right target monetary policymakers at the ECB and elsewhere should pursue, adding that the eurozone was still far from it. In fact, Eurozone inflation accelerated to 10% last month. Ultimately, this morning’s comments sent a very strong signal to all economic players that the ECB is set to bring down inflation to the aforementioned target within the next couple of years.

USD: The dollar held its ground on Monday as investors set their sights on data later in the week that is expected to show red-hot inflation after a strong U.S. labour market reinforced bets on higher interest rates. Another elevated inflation reading on Thursday would underline the case for even more hawkishness from the Fed after last Friday’s jobs report indicated that the labour market remains robust despite the Fed’s efforts to bring down high inflation by weakening growth. While economists expect the headline rate of inflation to moderate, core inflation, which strips out food and fuel costs, is expected to accelerate in September, keeping the Fed on track for a fourth consecutive 75-basis point rate hike in November. The economic calendar also features data on consumer sentiment which should show how U.S. consumers are faring after months of tighter monetary policy, along with data on initial jobless claims and wholesale price inflation.

The Final Stretch

A tumultuous year for financial markets is entering the final stretch, with the ongoing Russian-Ukraine war, Britain battling a self-inflicted crisis and markets pouring over U.S. jobs data to determine how much of an impact Fed hike are having on the U.S. economy.

GBP: Following some of the most turbulent weeks for the UK and the British pound, newly elected Prime Minister Liz Truss was forced into a humiliating U-turn this morning, reversing plans to cut the highest rate of income tax that helped spark a rebellion in her party and turmoil in financial markets. Truss and finance minister Kwasi Kwarteng announced a new “growth plan” on Sept. 23rd that would cut taxes and regulation, funded by vast government borrowing to snap the economy out of years of stagnant growth. But the plan triggered a crisis of investor confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to such an extent that the Bank of England had to intervene with a £65 billion ($73 billion) programme to shore up the markets. While the removal of the top rate of tax only made up around £2 billion out of a £45 billion pound tax-cutting plan, it was the most eye-catching element of an unfunded fiscal plan. The decision to reverse course is likely to put Truss and Kwarteng under huge pressure, less than four weeks after they came to power. Ultimately, from a market’s perspective, it is a good step in the right direction: although it will take time for markets to buy the message, it should ease some of the pressure off the British pound.

EUR: European stock markets are expected to open in a mixed fashion this morning as investors digest renewed regional energy concerns and political turmoil in the U.K.. The European Union energy ministers announced plans on Friday to introduce windfall profit taxes on energy firms, and EU leaders are set to meet at the end of the week to discuss how to step up support for Ukraine and their joint next steps to tame soaring energy prices. In the meantime, market participants are now expecting the European Central Bank to announce another hefty interest rate rise later this month after data on Friday showed that Eurozone inflation beat forecasts, climbing to a record high of 10% in September. Ultimately, Germany’s €200 billion plan to protect companies and households, which includes a gas price brake and a cut in sales tax for fuel, came as gas and electricity costs jumped, caused largely by a collapse in Russian gas supplies to Europe, and followed the continuously increasing inflation results.

USD: As the dollar consolidates near all-time highs, investors will be looking closely at this Friday’s U.S. jobs report to assess how much impact the Federal Reserve’s rate hikes are having on the economy. Several Fed officials are also due to speak during the week, as markets try to gauge their appetite for another 75-basis point rate hike at the bank’s November meeting. Economists are expecting the U.S. economy to have created 250,000 jobs last month, with the unemployment rate holding steady at 3.7% and wage growth staying elevated. Recent jobs data have indicated that the labour market remains robust despite a series of jumbo-sized rate hikes. In fact, another strong jobs report could underline the case for even more hawkishness from the Fed, potentially roiling markets already hard hit by worries over how high rates may have to rise as the central bank battles the worst inflation in forty years. On the other hand, indications that the labour market is slowing could add to fears that aggressive Fed tightening risks tipping the economy into a recession. In the meantime, U.S. equity markets look set to remain volatile after closing the books on their third straight quarterly decline last Friday. Attention later in the day will be on September data for the U.S. ISM manufacturing index. Nonetheless, it is unlikely to dent optimism around the US economy that has been building up further with positive economic indicators released over the last few weeks.