Fed Tensions and Unrest in Europe

November 22, 2021
The firming of expectations for the Fed to deliver the first hike of the cycle in mind-2020 remains as the key driver for currency markets. In Europe, Austria’s national lockdown came into effect on the weekend while the debate over compulsory vaccinations raged across the border in Germany.
  • More Fed officials are tilting hawkish; Fed Chair decision is imminent
  • Chile elections set the stage for a runoff between conservative Jose Antonio Kast and leftist Gabriel Boric
  • Mobility restrictions protests spread across Europe; Austria returns to a national lockdown
  • The PBoC’s monetary policy report signals continued policy accommodations

The firming of expectations for the Fed to deliver the first hike of the cycle in mind-2020 remains as the key driver for currency markets. In particular, it leaves the euro and EM on the backfoot, especially with resurfacing concerns about Covid in Europe. We don’t think the decision on the Fed chair will prove a big near-term event, with Powell more likely than not to be reappointed. In Europe, Austria’s national lockdown came into effect on the weekend while the debate over compulsory vaccinations raged across the border in Germany. This added up to further EUR weakness to start the week with the single currency falling to a 1.1263 session low while GBP lost its 1.13 handle as risk aversion spread across asset classes. Equities in the APAC region were mixed with Hang Seng -0.4% but Shanghai Comp +0.6% and Nikkei +0.1%. Elsewhere the Kospi (+1.4%) outperformed after better than expected export data while the Treasury rally slowed to a halt and the yield curve flattened. Oil was lower across classes as signs emerged over the weekend that more nations may release supply from strategic reserves.


More Fed officials are tilting hawkish. Bullard has set the gold standard, but others seem to be moving in his direction. Last week, Vice Chair Clarida said that it may be appropriate to discuss speeding up the taper pace in December due to higher inflation and increased job gains. He noted “I’ll be looking closely at the data that we get between now and the December meeting.” Governor Waller took a more hawkish position that’s very similar to Bullard, saying the “The rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022.” Bullard has explicitly called for faster tapering and two hikes in 2022. There are no Fed speakers this week.

We don’t think the decision on the Fed chair will prove a big near-term event, but the re-appointment of Powell likely to trigger some upside for the dollar as he is seen as marginally more hawkish than Governor Brainard. Senator Manchin last week asked to meet with Governor Brainard, while two other Democratic Senators (Whitehouse and Merkley) have said they would oppose a second term for Powell. Reports suggest most Republican Senators are lining up against Brainard and so the consensus appears to be Powell, and perhaps just barely. 

Lastly, the US fiscal outlook remains up in the air. The House passed President Biden’s “human infrastructure” bill last week by a narrow 220-213 vote. One Democrat and all Republicans were opposed. However, it’s not clear if it can pass in the Senate. All 50 Democratic Senators must vote in favor, and we do not yet know the status of Senators Manchin and Sinema yet. 

Chile elections went roughly as expected, setting the stage for a runoff on December 19th between conservative candidate Jose Antonio Kast and leftist Gabriel Boric. Kast took 28% of the vits and Boric 26%. The outcome is still highly uncertain, but at this stage Boric seems slightly more likely to win. If it plays out this way, Boric will challenge the taxes, the pension system, and we would expect greater fiscal outlays on welfare benefits. Needless to say, this will add yet another political headwind for the country’s already complex outlook. 


Mobility restrictions protests spread across Europe, while Austria returns to a full national lockdown, the fourth for the country. Also recall that Austria imposed mandatory vaccines to it citizens. Germany is also considering tighter restrictions. On the protests side, wire report unrest in Belgium, Netherlands, amongst other countries. There’s not much we can add to this aside from reaffirming our conviction that the ECB will remain amounts the most dovish G10 central banks.

The eurozone has a quiet week data week ahead. Preliminary November PMI readings will be reported Tuesday. Headline manufacturing PMI is expected at 57.3 vs. 58.3 in October, services PMI is expected at 53.5 vs. 54.6 in October, and the composite PMI is expected at 53.0 vs.54.2 in October. Looking at the country breakdown, the German composite is expected to fall a full point to 51.0, while the French composite is expected to fall slightly more than a point to 53.5. November German IFO business climate and French business confidence will be reported Wednesday. December German GfK consumer confidence will be reported Thursday. We see growing downside risks for the eurozone data in Q4 as the fourth virus wave sweeps over the continent. So far, Austria and Germany have been the hardest hit, but Italy is also coming under stress. 

Like the Fed, the debate about Bank of England policy continues to rage. Over the weekend, Governor Bailey said that risks to the U.K. economy are “two-sided” right now. This echoed similar comments Friday from Chief Economist Pill. Bailey and other BOE officials have blamed the market for misinterpreting official comments, but we find this to be disingenuous at best. It’s the job of central bank officials to clearly set forward guidance so that markets are not taken off guard. Failure to do so is on the bank, not the markets. Of note, WIRP continues to suggest 50-50 odds for liftoff at the next policy meeting December 16. Swap market sees 100-125 bp of tightening over the next twelve months, which strikes us as way too aggressive.

Poland’s October industrial and PPI Monday came in higher than expected. The former printed 7.8% y/y, well above the 5.3% expected. PPI also came in higher than expected at 11.8% y/y, suggesting that price pressures are still rising. CPI rose 6.8% y/y in October, the highest since May 2001 and well above the 1.5-3.5% target range. Yet the central bank has only hiked rates twice for a grand total of 115 bp. More needs to be done but the bank has not committed to an extended tightening cycle in its forward guidance. Next policy meeting is December 8 and another 75 bp hike to 2.0% is likely then. Swap market is pricing in another 150 of tightening over the next twelve months, which does not seem aggressive enough to us. Real retail sales will be reported Tuesday and are expected to rise 3.7% m/m vs. -2.4% in September.

Bank of Israel announces its decision shortly and is expected to keep rates steady at 0.10%. At the last meeting October 7, the central bank delivered a hawkish hold by announcing an end to QE and seeing the policy rate between 0.10-0.25% in a year vs. 0.10% currently. Inflation unexpectedly eased to 2.3% y/y in October, moving closer to the center of the 1-3% target range and so there is little pressure to deliver any further tightening near-term. However, it will likely reaffirm its commitment to use FX intervention to prevent excessive shekel strength. Ahead of the decision, October unemployment and September manufacturing production will be reported.


The PBoC’s monetary policy report signals continued policy accommodations. The report said that officials recognized that “the difficulty for maintaining sable economic operation has risen.” This will lean on reserve requirement cuts, but also on targeted credit boosting measures to supports sectors such as SMEs, rural areas and clean energy production. That said, we think will also try to carefully manage a slowdown in investment in the real estate sector. We don’t see any major changes in policy for the currency as the PBoC will be mindful of the growing yield gap between China and the U.S. as the Fed embarks on tapering cycle. The PBoC kept the Loan Prime Rates on hold, as expected.

Still resilient external trade data out of South Korea suggest domestic and global activity remains resilient. For the first 20 days of November, Korea’s exports rose 27.6% y/y and imports 41.9% y/y. Unequivocally strong figures even after adjusting for base effects and seasonal factors. Bank of Korea meets Thursday and is expected to hike rates 25 bp to 1.0%. After it started the tightening cycle with a 25 bp hike to 0.75% in August, the bank remained on hold in October, signaling a modest pace of hikes likely lies ahead. Indeed, the next hike to 1.25% isn’t fully priced in until Q3 2022. However, markets may have to reassess this path as price pressures are rising. Last week, October PPI was reported at 8.9% y/y vs. 7.6% in September. This was the highest since October 2008 and warns of upside risks to CPI, which rose 3.2% y/y in October. This was the highest since January 2012 and further above the 2% target.

Taiwan reports October export orders came in at 14.6% y/y, below expectations for 21.6% y/y and 25.7% in September. Despite the lower print, it’s the 20th consecutive month of export orders growth. IP will be reported Tuesday and is expected to rise 11.90% y/y vs. 12.24% in September. While the economy remains in solid shape, the political landscape is likely to get more uncertain. A bipartisan group of lawmakers last week reintroduced a bill that would require the U.S. to seek Taiwan’s membership and meaningful participation at the IMF. While the bill is unlikely to go anywhere, it represents a growing effort by the West to push back against China’s growing assertiveness regarding Taiwan. Elsewhere, Taiwan has applied for members hip in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), while China has also applied.


Eurozone reported stronger than expected Q4 GDP.  Last week, Germany, France, and Spain all reported stronger than expected GDP data and so we warned of upside risks to the headline eurozone reading.  GDP contracted   -0.7% q/q vs. -0.9% expected and a revised 12.4% (was 12.5%) in Q3.  If we were to simply annualize this rate, it would be around -3% and nearly seven percentage points lower than the 4% growth posted by the US in Q4.  Of note, the y/y rate came in at -5.1% vs. -5.3% expected and -4.3% in Q3. Looking ahead, the problem is that the entire region may still be in for prolonged virus lockdown cycle, especially with the vaccine rollout issues and so eurozone underperformance is set to continue in Q1 and perhaps Q2.

France reported higher than expected CPI.  Headline inflation was 0.8% y/y (EU Harmonized) vs. 0.5% expected and flat in December. Eurozone January CPI will be reported tomorrow, with headline inflation expected at 0.6% y/y vs. -0.3% in December.  Last week, Germany and Spain also reported higher than expected inflation and so there are upside risks to the headline eurozone reading.  Yet we know from the level of concern about deflationary risks that this move higher is seen as transitory. The same goes for the US and most other major economies, as low base effects from the pandemic will eventually give way to high base effects from the recovery.

Reports suggest UK Chancellor Sunak will not hike taxes in his March budget. Prime Minister Johnson is reportedly keen to keep his election promise not to increase income taxes, national insurance, or the VAT. While we recognized the need for virtually every country to get back on a sustainable fiscal trajectory, now is simply not the time. Any sort of tax hikes would damage a recovery that is anything but strong right now. Instead, we look for Sunak to extend government support programs in the March budget whilst paying lip service to some vague future action to help limit the explosive budget deficits.


As reports suggested, Japan Prime Minister Suga extended the state of emergency in ten of the eleven prefectures by a month.  The measures have been in effect since early January and were due to expire February 7. These prefectures together account for around 60% of GDP. Suga said that while infections have come down, the numbers were still concerning.  Residents have been asked to avoid going out after 8 PM, while bars and restaurants have been asked to voluntarily close at that time. The lower house yesterday passed two bills meant to improve enforcement of restrictions, including fines for bars and restaurants that do not close as requested.

Reserve Bank of Australia delivered a dovish hold.  While the cash rates and 3-year yield target were kept at 0.10%, as expected, the RBA extended its asset purchases beyond mid-April with an AUD100 bln increase. Governor Lowe said “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labor market. The board does not expect these conditions to be met until 2024 at the earliest.” The bank releases its quarterly Statement on Monetary Policy Friday, which will contain updated macro forecasts.  Governor Lowe speaks Wednesday and then testifies to parliament Friday.

AUD is down today as a result of the RBA decision. While we were skeptical, some analysts were looking for some sort of tapering message. Instead, the RBA delivered quite the opposite. We suspect Australian policymakers are watching the apparent slowdown in China’s economy as closely as we are and is taking no chances with any sort of premature withdrawal of accommodation. Iron ore futures have certainly taken note, with prices falling eight of the past eleven days for a cumulative loss of nearly -15%. Of note, AUD has been the worst performer in the majors this past week, down nearly -2% against USD. It is on track to test late December lows near .7555 and then .7515. However, a break below the .76 area would set up a likely test of the December 21 low near .7460.


As we suspected, the supposed attempt by Redditors to engineer a short squeeze in silver is not going as well. For the reasons we discussed yesterday, the market setup and the of silver trading volume is not comparable to that of GameStop. On top of this, the CME increased margin requirements for the metal futures. Silver is down 3.5%, reversing about half of yesterday’s gains. Separately, the retail trading app Robinhood raised another $2.4 bln. This is on top of previous $1 bln raised in the wake of the GameStop event. Of note, shares of that company and other caught in the frenzy are down sharply today in pre-market trading. The US House will hold a hearing on the matter on February 18.

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