Week ahead: will US inflation keep on burning?

Week Ahead

The week’s key data release is the US CPI inflation report for November. How long can the United States’ economy take the heat before the Fed fires up the extinguishers? Central banks are in focus but don’t expect rate hikes from the Bank of Canada or Reserve Bank of Australia just yet. There’s still work to be done. 

US CPI data: transitory retired – inflation here to stay? 

Starting on the data front, US CPI stats for November are reeled out this week. Friday’s numbers will help us keep up with the ongoing inflation narrative. The Fed has retired the word “transitory” to describe the continued streak of higher prices – the only question is how high can they go? 

October’s data may give us some clues as what to expect: prices going up, and up and up. Consumer Price Index growth reached a sizzling 6.2% that month – up 0.9% month-on-month – a rate not seen since December 1990. 

You’d think this would spur the Fed into action, particularly when also considering the tightness of the US labour market. Jobless claims are at their lowest since 1969. There are plenty of vacancies, but who is going to fill them? 

Fed Chair Jerome Powell has had a positive banquet on his plate trying to steer the US economy back on track post-pandemic. He’s still the Fed’s head honcho, following his renomination as Chairman by President Biden earlier in November.  

In recent remarks, Powell said that the Fed will pick up the pace of its QE tapering programme. Markets are expecting a rate hike sooner rather than later. But with GDP growth slowing in the US, the Federal Reserve is caught between a rock and a hard place. It’s going to have to tighten policy but doing that in a slowdown doesn’t present a particularly great outlook for the United States’ economy.  

Even so, inflation looks like it’s here to stay. Let’s see what Friday’s CPI report brings. 

A Bank of Canada rate hike is on the way – but just not yet 

Talk of a BoC rate hike has been filtering through the markets for the past couple of months and Governor Tiff Macklem has said one is “getting closer”. However, it might be as close as you think. 

“For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer,” Macklem wrote in an op-ed for the Financial Times newspaper in mid-November. 

While the Fed may be ditching the transitory vibes, the Bank of Canada appears to be happy to stick with them. This is despite the tacit acceptance that inflation risks are here to stay. Labour shortages, supply disruptions and soaring energy costs are a dangerous economic mix after all. 

But while Macklem has hinted rates could be raised, one of his BoC Deputies Lawrence Schmerbi’s comments to Reuters have provided a little more clarity on the hike’s timing. 

“There’s a lot of uncertainty about the timing of the closing of the output gap, so one should be careful not assuming it’s necessarily going to be the second quarter. It’s a range of six months — that’s our best estimate,” he said. 

The BoC’s inflation target is 2%, but recent data shows inflation is flying way past that. Inflation rose to 4.7% in October, the most up-to-date numbers available, up from 4.4%. The Bank’s 1-3% control range is being sorely tested. 

Scotiabank believes at least eight hikes covering 200 basis points will be needed in the coming years in order to tame this scorching inflation. We know the Bank IS planning to raise rates, and we know roughly when. It’s all about waiting now – unless the Omicron COVID-19 variant instigates another lockdown that is. 

The Bank of Canada gives its December rate statement on Wednesday. 

Don’t hang around for an RBA rate hike either 

The current Reserve Bank of Australia cash rate is 0.1%. It’s been at that historic low for quite some time now. It also looks like it’s sticking around. 

Despite inflation creeping up, Australia’s top central banker RBA Governor Philip Marlowe says the time is not right to start thinking about any rate movement. 

“The latest data and forecasts do not warrant an increase in the cash rate in 2022,” Lowe said. “The economy and inflation would have to turn out very differently from our central scenario for the Board to consider an increase in interest rates next year.” 

2024 appears to be when the RBA will move the dial. 

Core inflation reached 2.1% in Q3. That puts it inline with the RBA’s 2-3% target band. This is also the first time core inflation has reached that level for six years. 

Australia’s circumstances are different to other advanced economies such as the US. Labour market participation is scraping record highs. Wage-setting systems put in place seem to lead to staggered increases, rather broad-based surges. 

“We are expecting the recovery to continue and the unemployment rate to trend lower, reaching 4% by the end of 2023,” Lowe said. “It is therefore possible that faster-than-expected progress continues to be made towards achieving the inflation target. If so, there would be a case to lift the cash rate before 2024.” 

Expect a similar statement when the RBA speaks on Tuesday morning.  

Major economic data 

Date  Time (GMT))  Asset  Event 
Tue 07-Dec  Tentative  CNY  Trade Balance 
  3:30am  AUD  Cash Rate 
    AUD  RBA Rate Statement 
  10:00am  EUR  ZEW Economic Sentiment 
    EUR  German ZEW Economic Sentiment 
  3:00pm  CAD  Ivey PMI 
Wed 08-Dec  3:00pm  CAD  BOC Rate Statement 
    CAD  Overnight Rate 
    USD  JOLTS Job Openings 
  3:30pm  USD  Crude Oil Inventories 
  Tentative  CAD  BOC Press Conference 
  6:01pm  USD  10-y Bond Auction 
Thu 09-Dec  1:30pm  USD  Unemployment Claims 
  6:01pm  USD  30-y Bond Auction 
Fri 10-Dec  1:30pm  USD  CPI m/m 
    USD  Core CPI m/m 
  3:00pm  USD  Prelim UoM Consumer Sentiment