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Transitory no more

Tearing up the script

Everybody knew what the Federal Reserve Chairman (USD) was going to tell the Senate Banking Committee yesterday: they had already seen the text of his speech. Except Jerome Powell had not written down absolutely everything he intended to tell the committee. His tone was a good deal more hawkish than investors had been expecting.

Mr Powell made a couple of comments that took financial markets aback. First, the Federal Open Market Committee (USD) is “going to discuss a somewhat faster taper [of the asset purchase programme] at our next meeting”. Second, the adjective “transitory” will no longer be applied to inflation: “I think it’s probably a good time to retire that word and try to explain more clearly what we mean”. The sentiment was less of a surprise than the timing, coming as it did only a few days after the discovery of the Covid Omicron variant.

Market reaction was mixed, if not confused. Equities in the US and Europe fell, while in the Far East this morning they held steady or drifted upwards. The immediate reaction of the US dollar (USD) was to spike higher - the traditional response to the prospect of higher US interest rates - but most of that rally was quickly wiped out. On average the dollar is all but unchanged on the day. The safe-haven Japanese yen (JPY) is the biggest loser, down by 0.7%, and the Swiss franc (CHF) is steady against sterling with a 0.4% gain. The front-runner is the Swedish krona (SEK), with the NOK, NZD and AUD taking the next three places.

 

Still transitory?

Inflation in the Eurozone (EUR) came in at a provisional 4.9% for November, its highest level since the birth of the single currency last century. The European Central Bank did not rush to comment, leaving investors to believe it still sees no reason to react with tighter monetary policy.

Governing Council member Jens Weidmann, president of Germany’s Bundesbank (EUR), did reiterate his well-aired opinion that the ECB should not be so soppy about doling out free money to spendthrift national governments but he is leaving at the end of the year. Otherwise investors had to rely on what the main protagonists had said earlier in the month. The best guess remains that there will be no policy change when the Governing Council meets in a fortnight’s time.

Tuesday’s US data (USD) made little difference, given the enormity of the Fed Chairman’s comments. Consumer confidence fell two points to 109.5 in November. House prices rose by either 18.5% or 19.5% in the year to September. In Canada (CAD) gross domestic product expanded by a bigger-than-expected 1.3% in Q3. The Loonie was flat on average.

 

Pinch punch PMI day

Australia (AUD) launched the month with two respectable purchasing managers’ indices from the manufacturing sector. AiG’s performance of manufacturing index was four and a half points higher at 54.8, while Markit’s PMI was up by a point at 59.2, a six-month high.

Australian GDP was less impressive – though not as soft as expected – with a 1.9% shrinkage in Q3. Japan’s (JPY) manufacturing PMI was a touch better on the month at 54.5. The lowest reading so far – and perhaps for the day – is from China (CNY), where the equivalent measure slipped below breakeven to 49.9. Other data already released today relate to UK house prices (GBP), which are 10% higher on the year, and Swiss inflation (CHF), which roared ahead to 1.5% in November.

There are PMIs aplenty to come, with UK manufacturing estimated at 58.2. The other numbers cover Canadian building permits (CAD), ADP’s US employment change number (USD) and the Fed’s Beige Book assessment (USD) of the US economy. This afternoon Fed Chairman Jerome Powell (USD) will tell the House of Representatives roughly what he told the Senate yesterday. Australia’s trade figures (AUD) come out tonight.

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