Jamie Jemmeson
November 17, 2021

Data Supports the Case for a December Rate Hike

The Sterling made further gains yesterday following the positive unemployment report. The UK’s job market withstood the end of the government’s furlough scheme last month which could ease lingering concerns by the Bank of England (BoE) about the risks of raising interest rates from their pandemic low. The data showed that the unemployment rate fell (by more than expected) to 4.3% for the 3 months to September. In the meantime, employment rose by 247k between July and September which was more than the predicted increase of 185k. BoE Governor Andrew Bailey has stated that the jobs data, which will be followed by another release are due in four weeks will be critical for the Central Bank’s thinking on whether to raise the bank rate for the first time since the pandemic struck. The BoE’s next monetary policy announcement is also scheduled for December 16.

This morning, the inflation data showed a sharp increase in the headline figure to 4.2% from 3.1% previously and above consensus forecasts of 3.9%. This is the strongest reading since 2012. The increase primarily reflected higher energy prices with the exception of core inflation after the Office of Gas and Energy Markets (Ofgem) raised its price cap. In addition, core rates (excluding food and energy) also increased to 3.4% from 2.9%. Inflation is set to remain elevated and will probably move even higher in the near term with the BoE forecasting a peak of around 5% in April next year. The data will have strengthened the case to raise interest next month.

US Dollar Strength Continues following Strong Retail Sales and Industrial Production Data

The US Dollar continued its recent strength against several major currencies, receiving a further boost from (better than expected) US retail sales and industrial production. Retail sales rose to 1.7% month-on-month (MoM) in October, the highest level since March. The figure showed that consumer spending is rising quicker than market expectations which again raises the question of the Federal Reserve (Fed) speeding up the pace of tapering. The US Dollar extended gains following the release of yesterday’s figures and on the back of last week’s Consumer Price Index (CPI) Data, which was reported above 6%. The increase in consumer spending increases pressure on Fed Chair Jerome Powell to bring forward forecasts for rates sooner in 2022. Yesterday, Fed speaker James Bullard commented that the Fed should signal a more hawkish approach in the next rate meetings in preparation for higher inflation rates persisting for a longer period than anticipated.

A quieter day on the economic calendar, markets will review October’s housing statistics as the only significant release. Investors will pay attention to comments from several Fed speakers due to speak later in the afternoon.

The Single Currency Makes Gains but could Lockdown Further Dent It?

The single currency has made a small gain against the US Dollar following rumours that the US and China are tapping emergency oil reserves in a coordinated move to bring down fuel prices. However, much of the news has been dominated by headlines that suggest Germany may be heading toward stiffer restrictions on people who have refused a COVID-19 vaccine. Germany is currently grappling with its worst outbreak in the pandemic, posting a fresh record in its contagion rate on Tuesday. Dirk Wiese, deputy caucus leader for the Social Democratic Party (SPD) stated that in reality, a lockdown for the unvaccinated should be on the way. The market will keep an eye on this and how it is rolled out.

It is fairly quiet today with only the Eurozone Consumer Price Inflation (CPI) final figures available for October. The earlier flash estimate showed an unexpectedly sharp rise to 4.1% in October from 3.4% in September (with the increase) mostly reflecting higher energy prices.

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