Central Bank Hawks and Oil Showdown

November 23, 2021
  • Fed re-nomination of Powell led to a bear flattening of the Treasury curve
  • Oil prices are lower on escalating supply tug of war
  • German Chancellor Angela Merkel called for tighter mobility restrictions
  • Stronger European and UK data reinvigorates the hawks

Markets are digesting Powell reappointment and stronger data out of Europe. APAC equities were again mixed with Nikkei +0.1%, Hang Seng -1.1%, and Shanghai Comp +0.2%. Equity markets are broadly lower in Europe and U.S. future down 0.3%. In FX, USDJPY rose to a four-year high of 115.15. EUR received a minor bid from stronger PMI figures and hawkish comments by ECB’s Isabel Schnabel on inflation risks. Oil prices are down again, with Brent at $78.50 per barrel amid a battle over who will dominate the supply narrative. Several countries, including the U.S., India, and China, said they would start tapping their strategic reserves to alleviate the recent price pressures. OPEC+ has counterattacked by stating they could respond by reconsidering increasing production quotas, as originally planned. The backwardation of the crude curve is also being quickly removed as prices for shorter contracts fall faster than longer-dated ones.

AMERICAS

As we had expected, the Fed nomination decision sent some ripples across financial markets. Markets perceived the outcome as marginally hawkish, and futures now firmed up expectations for a hike in June from having been skewed towards July. We could soon see May coming into play. For now, the Treasury yield curve bear flattened, as we would expect, and real yield became less negative. Governor Brainard was nominated as Vice-Chair, taking over from Clarida early next year. Biden has three more vacancies to fill, but again we don’t expect anything controversial.

 

EUROPE / MIDDLE EAST / AFRICA

 
German Chancellor Angela Merkel called for tighter mobility restrictions. She characterized the latest wave of infections as the worse the country has experienced, calling the situation “highly dramatic.” Germany is again facing the risk of hospitals becoming overwhelmed during the Covid’s fourth wave. Vaccinations are still below 70%, and while the death rate remains comparatively low, it will probably increase.

On the data front, the euro area’s November PMIs came in on the firmer side, with some signals of inflation pressures. The preliminary reading for the manufacturing component rose to 58.6, the services to 56.6, and the composite to 55.8, all beating expectations. While good news, we have no doubt this optimism will start coming down quickly as the latest wave of infections (and social unrest) takes its toll. IHS Markit’s spokesperson also noted that growing price pressures from supply chain bottlenecks and energy prices, with “upward pressure on prices […] intensified far above anything previously witnessed by the survey.” This puts the ECB in a difficult position, but we still think the balance of risks points to a dovish outlook. Indeed, ECB Executive Board member Schnabel has just characterized inflation risks as being “skewed to the upside.”


Euro area consumer confidence released yesterday contracted to -6.8 for the November advance reading. The decline is considerably greater than the -5.5 expected and a big drop from the previous -4.8 print. In short, the number suggests greater concerns by the region’s consumers in the face of worsening Covid outlook and higher headline inflation. Unfortunately, this outlook is only set to worsen, as seen by stricter lockdown measures and social unrest across many European countries.


UK’s PMI figures also surprised on the upside in November. The preliminary reading for the manufacturing component rose to 58.2, the services to 58.6, and the composite to 57.7. The numbers will support the hawkish case for a near-term hike by the BoE as it confirms that momentum in the UK economy remains strong. The December policy meeting will be a big one.
The Turkish lira remains on the secular downtrend receiving its latest kick from President Erdogan, reaffirming his call for lower rates. This happened in a speech yesterday confirmed the government’s priority is growth and employment, despite extremely high inflation and a weaker currency. The central bank, being subservient to the central government, will surely comply. Markets already expect a 50 bps at least, which we agree with. USD/TRY is up 5% today, rising for 11th consecutive sessions, the longest losing streak in 20 years, according to Bloomberg’s count, crossing the 20 level.

ASIA

Singapore’s October CPI came in 0.4 ppts higher than expected to 3.2% y/y. The upside surprise was mainly driven by services and food prices. The Ministry of Trade and Industry expects “a steady increase in core inflation in the quarter ahead.” Core inflation rose 1.5% in the month. This reaffirms the MAS’s shift towards an inflation focus in this part of the cycle. While the MAS does not have an explicit inflation target, rising price pressures led the bank to tighten policy last month with a modest steepening of its S$NEER trading band.

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