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Omicron vs 5.1

Delete transitory, insert persistent

As widely expected, the Federal Open Market Committee (USD) announced yesterday that it would reduce the pace of its QE asset purchases. It also indicated that there will be three quarter-percentage-point rate increases next year, but nobody really fell for that.

The message from Fed Chairman Jerome Powell (USD) was that the inflation which, only a few weeks ago, had been described as “transitory”, has now become “uncomfortably high” and poses a “threat” to the economy. Monthly asset purchases should be down to zero by the end of March. The dot plot of FOMC members’ expectations shows all of them going for a higher funds rate next year, with a majority looking for a net rise of 75 basis points, and all anticipating a funds rate of above, or well above, 1% in 2023.

In yet another example of could-have-been, the news failed to arouse enthusiasm for the USD. The accelerated tapering had been priced in for a week or two, and there was considerable scepticism about the prospect of three rate hikes in 2022. Investors and commentators suspect that Mr Powell is something of a dove in hawk’s clothing and that the FOMC is playing the same game, happier to deliver words than deeds. The USD is exactly unchanged on the day against the GBP, and both are down by an average of 0.2%.

 

Higher prices everywhere

Following on from inflation rates of 3.4% in France (EUR), and 5.5% in Spain and South Africa (ZAR), Italy delivered a 3.9% and Canada (CAD) came in at 4.7%. UK house prices (GBP) went up by 10.2% in the year to October. The Canadian figure gave especial poignancy to the governor of the Bank of Canada’s address to the Empire Club of Canada, in which he stressed the importance of the 2% inflation target.

The other data on Wednesday were mostly from the United States. The New York Fed’s manufacturing index (USD) was a point higher on the month at 31.9, as business activity “continued to grow strongly”. US retail sales were less robust than expected in November, up by only 0.3% on the month with the important “control group” down by 0.1%. At 84, the NAHB housing market index showed builder confidence rising despite “labor shortages, supply delays and price volatility”.

Overnight, Australia’s Labour Force report (AUD) delivered good results for November. A total of 366k new jobs took the participation rate up to 66.1% and the unemployment rate down to 4.6%, close to its lowest level in 13 years. The provisional purchasing managers’ indices from Australia were lower on the month but a little better than expected.

 

Central bank day

There are monetary policy announcements today from Norges Bank (NOK), the Swiss National Bank (CHF), the Bank of England (GBP), Turkey’s central bank (TRY) and the European Central Bank (EUR). Only the Norwegian central bank is expected to make any change to interest rates, with a doubling of its benchmark rate to 0.5%.

Where, six weeks ago, the BoE (GBP) appeared to be teeing up a November rate increase, today, the Monetary Policy Committee is expected to do nothing. Although it is impossible to rule out a rate increase, investors assume the MPC will exercise caution in the face of the rapidly-spreading Covid Omicron. The most intriguing question is what the ECB (EUR) will say about rising prices. Until now, Frankfurt has followed the now-abandoned Federal Reserve line about the transience of inflation. Will it strike a more hawkish pose today? The most egregious decision could be another rate cut in Turkey. President Tayyip Erdogan is convinced that slashing interest rates is the best way to attack inflation. The policy has cost the TRY half its value so far this year.

Today’s ecostats include more provisional PMIs and US jobless claims. Friday starts with UK retail sales. There will also be a monetary policy announcement from the Bank of Japan tomorrow; no change is anticipated.

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