Jamie Jemmeson
October 12, 2021

Ranges Remain Intact As The Global Economy Ponders Interest Rates And Inflation

Sterling Muted On Labour Data But Wage Growth Highlights Inflationary Pressure

Sterling posted gains early in Europe on Monday following the comments regarding interest rates over the weekend, raising further expectations that the Bank of England (BoE) will move closer to an increase in interest rates in December. Despite rising expectations of a hike, Sterling failed to break any new ground as concerns surrounding stagflation remain. In terms of economic data, it was quiet yesterday, but the labour data has come out this morning.

The headline numbers showed that September was the biggest month-on-month increase in the number of employees on companies’ books, up by 207,000 from August. The unemployment rate edged down to 4.5% in the three months to August from 4.6% in the May-July period. Sterling reaction was muted due to furlough with a reported 1.6 million on the scheme in July which provides a false economy to these numbers.

The market will watch the unemployment rate carefully next month now that the furlough has ended. However, inflationary pressure remains evident as average weekly earnings were 7.2% higher than in the same three months of 2020, slowing from the previous readings of 8.3%.

Dollar Remains Well Supported Following Payroll’s Data

The US dollar remains well supported following Friday’s release of September’s non-farm payrolls data. Despite the low reading of 194,000 new jobs created against a consensus of 500,000, signs of growth across the labour market are expected to pave the way for the Federal Reserve (Fed) to begin tapering their bond-buying programme in November and a possible interest rate hike in late 2022.

Elsewhere, investors remain in a cautious mood with the Dollar index trading around levels not seen since September 2020. China Evergrande Group reportedly looks set to miss its third round of bond payments in as many weeks which has bolstered expectations for a full-scale default. Another factor weighing on risk appetite came as smaller developer Modern Land asked investors to push back a $250 million bond payment due on 25 October by three months.

Looking ahead this week, the spotlight will be on the FOMC minutes report on Wednesday as investors look for further guidance from the Fed’s policymakers. Focus will also be given to the release of Consumer price data later in the week.

Doves Vs Hawks In The Eurozone

It was a baron day for the Eurozone macro-calendar yesterday and unfortunately, today appears to follow suit except for the German ZEW Economic Sentiment this morning. The October index is forecast to show a decline to 27.9 from September’s reading of 31.1. In addition to the investor survey, we hear from several European Central Bank (ECB) speakers including; Knot, Lane and Lagarde providing a balance of both Hawks and Doves. It will be interesting to hear whether the Doves will adjust their previous position regarding the transitory nature of Eurozone inflation. Any surprise comments from the ECB speakers or a surprise reading to the ZEW Index this morning could provide some direction for the Euro.

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