Germany’s New Chancellor; RBNZ Hikes Again

November 24, 2021
  • Olaf Scholz is set to become the next German Chancellor after sealing an alliance with the Greens and Free Democrats
  • The Reserve Bank of New Zeeland (RBNZ) hiked rates by 25 bps to 0.75% as most expected, but many took it as a dovish sign
  • U.S. President Biden played this strategic reserve gambit yesterday, releasing 50 mln barrels of crude
  • The Turkish lira drama continues but with a 2% relief rally after the currency fell a whopping 12% yesterday

The dollar is slightly weaker on the day but moves have been modest ahead of the U.S. holiday. The biggest headline came from Germany, with Olaf Scholz is set to become the next German Chancellor. Also, the RBNZ continued its fight against inflation overnight and raised interest rates by 25bps while signaling there is more to come. This move was seen as less aggressive than forecast by the market and saw Kiwi bond yields decline and the NZD sliding to a 0.6896 session low. In the FX majors, USDJPY was again unable to hold a move above 115 while GBP and EUR fell back to 1.3368 and 1.1233 lows, respectively. APAC equities were lower as traders continued to cite risks from tighter monetary policy globally, with the Nikkei -1.6% back after yesterday’s holiday, and European equities and U.S. futures are mixed.


U.S. President Biden played this strategic reserve gambit yesterday, releasing 50 mln barrels of crude. Futures ticked higher on the news, in part because 32 mln of this supply will be in the form of a swap, meaning they will return to the Reserve at some point. Now it’s the turn of OPEC+ to play its hand, but it’s unlikely they will be overly aggressive seen that oil prices have not come off too much. Our best guess is that the net effect of Biden’s action will be to stall the upwards momentum in oil futures, but it’s unlikely to make a huge difference in the current energy imbalance. 

Weekly jobless claims come out shortly. The continuing claims data are for the BLS survey week containing the 12th of the month and are expected at 2.052 mln vs. 2.08 mln the previous week, which would be a new pandemic low. Initial claims are expected at 261k vs. 268k the last week. That previous reading was for the BLS survey week and was a new pandemic low as well. All signs point to continued healing in the labor market. Consensus sees 500k jobs added this month vs. 531k in October, with the unemployment rate seen falling a tick to 4.5%, also a new pandemic low. We also get our second look at Q3 GDP today. Growth is expected to be revised up to 2.2% SAAR vs. 2.0% previously. Still, this is old news. Looking ahead, the U.S. economy is rebounding quite nicely in Q4. The Atlanta Fed’s GDPNow model is tracking 8.2% SAAR growth and will be updated Wednesday. Elsewhere, Bloomberg consensus sees 4.8% SAAR growth in Q4, slowing to 4.2% in Q1 and 3.9% in Q2. 

Mexico reports mid-November CPI later today. Headline inflation is expected to rise 6.88% y/y vs. 6.12% in mid-October. If so, it would be the highest since May 2001 and further above the 2-4% target range. Q3 current account data will be reported Thursday, with a deficit of -$4.9 bln expected vs. a $6.3 bln surplus in Q2. Banco de Mexico minutes will also be released Thursday. At the last meeting, the bank hiked rates 25 bp to 5.0% in a 4-1 split decision with the dissent in favor of steady rates. The next policy meeting is December 16, and another 25 bp hike to 5.25% is likely. The swap market is pricing in another 200-225 of tightening over the next twelve months, which seems too aggressive to us. October trade will be reported Friday, with a deficit of -$2.5 bln is expected vs. -$2.4 bln in September.

Brazil reports mid-November IPCA inflation and October current account data Thursday. Inflation is expected at 10.66% y/y vs. 10.34% in mid-October. If so, it would be close to the cycle high from October and well above the 2.25-5.25% target range. Of note, that range is set to fall to 2-5% in 2022. The next COPOM meeting is on December 8. While the bank promised another 150 bp, markets were disappointed with the last 150 bp hike to 7.75% in October. CDI market is looking for a larger 175-200 bp move next month. The swap market is pricing in another 525 of tightening over the next twelve months, which seems too aggressive to us.


ECB hawks are getting louder. Yesterday, Governing Council member Gabriel Makhlouf said the ECB “cannot afford to be complacent,” and it needs to “recognize that there are risks to the inflation outlook.” If this persists, he said, “the case for monetary policy action becomes stronger.” His comments come on the heels of ECB Executive Board member Schnabel who characterized inflation risks as being “skewed to the upside.” This objective of the game now is to gain optionality; we doubt there will be any imminent policy change, but it’s best to prepare markets for the possibility.

Olaf Scholz is set to become the next German Chancellor after sealing an alliance with the Greens and Free Democrats. We don’t have any details yet, but the country will have a new government in early December. This is the first time such a coalition has occurred at the national level, so it might imply a period of uncertainty at the onset. And it’s only the third time since WWII that the CDU is in opposition. FDP Chair Christian Linder should be the new finance minister, and Robert Habeck (co-leader of the Greens) will be the “super minister” overseeing the economy and energy policy. 

On the data front, Germany’s IFO survey came in slightly below expectations. The expectations component was 94.2, current assessment at 99.0 and business climate at 96.5. It’s the same story as other data points: the combination of higher inflation and resurging Covid concerns will continue to take a toll on sentiment.

The Turkish lira drama continues with a 2% relief rally after the currency fell a whopping 12% yesterday. The good news is that we don’t see this causing significant spill over in terms of sentiment contagion. In our assessment, investors are hardly involved in the country’s local assets and haven’t been for some time. The risk is if the crisis triggers erratic moves by Turkey on the geopolitical front, possibly against the EU. USD/TRY hit an intraday high of TRY 13.45 yesterday after coming off to 12.60 at the time of writing.

Looking ahead, the Riksbank meets Thursday and is expected to keep rates steady at 0.0%. We expect the bank to extend its flat rate path by another quarter to Q4 2024. Macro forecasts will be updated, and 2024 will be added for the first time. At the last meeting on September 21, it delivered a dovish hold. Inflation forecasts were tweaked higher, but the bank said it welcomes inflation above 2% for some time as this would help to “more clearly anchor price and wage expectations in a way that is compatible” with its inflation target. Lastly, the bank stressed that “The risks with reducing stimulation measures too early are therefore still judged to be greater than the risks of retaining them too long.” The Riksbank stands out as one of the most dovish central banks right now and is likely to remain on hold for the foreseeable future. The swaps market is pricing in nearly 50 bp of tightening over the next twelve months, which we view as highly unlikely.

South Africa reports October PPI Thursday. It is expected to pick up to 8.0% y/y vs. 7.8% in September. Last week, the SARB delivered a 25 bp hike to 3.75% and signaled quarterly hikes in 2022, 2023, and 2024. However, the vote to hike was a split 3-2, supporting our view that this aggressive rate path will be hard to achieve. Indeed, Bloomberg consensus sees only a 25 bp hike in H1 and another in H2 that would take the policy rate to 4.25% by the end-2022. The next policy meeting is January 27, and steady rates are likely then. Moody’s is set to review the country Friday, and the recent medium-term budget statement likely helped stave off another downgrade from the current Ba2. Indeed, its outlook may be moved from negative to stable on the strength of the budget.

National Bank of Hungary is expected to hike the one-week deposit rate Thursday by 10 bp to 2.60%. Last Thursday, the bank unexpectedly hiked this rate 70 bp to 2.5% after hiking the benchmark rate last Tuesday 30 bp to 2.1%, as expected. These two rates are typically the same and move together, but the bank recently said that it “must be ready to set the interest rate on the one-week deposit above the base rate” so that any increase in short-term risks in financial and commodity markets can be addressed “quickly and flexibly.” With the forint coming under greater pressure last week, the bank is expected to snug the one-week rate higher.


The Reserve Bank of New Zeeland (RBNZ) hiked rates by 25 bps to 0.75% as most expected, but many took it as a dovish sign. A few analysts called for a 50 -hike, which helps explain NZD’s underperformance (-0.5% against the dollar). One of the bank’s main concerns is that labor shortages will make what seems to be transitory inflation into a more permanent phenomenon. It’s unclear how this will play out, but the bank’s model and our expectation is for the tightening cycle to continue for now.


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