Bank Indonesia (BI) left interest rates unchanged again today, and the relative weakness of inflation means any tightening cycle is unlikely to be aggressive. We are maintaining our view the central bank will raise interest rates by just 25bps this year. …
23rd June 2022
This morning’s decision by the Norges Bank to raise its key policy rate by 50bps, to 1.25%, was in line with our non-consensus forecast. Also, as we predicted, the Bank all but confirmed that it will break with tradition and raise rates at the “interim” …
The central bank in the Philippines today raised its policy rate by another 25bp (to 2.5%), and signalled that further tightening was likely. However, with inflation set to peak soon and headwinds to the recovery mounting, we think the tightening cycle …
There is still scope for an improvement in labour supply in the US, UK and euro-zone, which might over time alleviate some of the tightness in their labour markets. But it could yet take a long time to materialise. Unemployment rates are now back at, or …
The minutes of the MPC’s June meeting – in which the repo rate was hiked by 50bps to 4.90% – show that combatting inflation remains the priority and suggest that tightening will continue to be frontloaded. The MPC voted unanimously to raise the repo rate …
22nd June 2022
We now think that the yields of 10-year developed market (DM) government bonds will peak earlier and, in some cases, at higher levels than we previously expected. That reflects a view that tightening cycles in many DMs will be more front-loaded and …
Inflation in South Africa has been close to the top of the central bank’s target range in recent months, but the country has avoided the surge in inflation seen across much of the world. And there are reasons to think that the headline rate will drop back …
21st June 2022
A threatened strike at Chile’s copper giant, Codelco, could knock as much as 0.3%-pts off quarterly GDP growth for every week that workers are on strike and worsen the country’s balance of payments strains. What’s more, it may not even be enough to give a …
By cutting GDP growth by about 0.3-0.4 percentage points (ppts) in Q2 and raising GDP growth by a similar amount in Q3, the impact of the extra bank holiday to mark the Queen’s Platinum Jubilee will all come out in the wash in the end. But it will add …
We suspect that the main reason for the hasty withdrawal of the Financial Policy Committee’s mortgage affordability test is that it was on course to become a severe constraint on many buyers’ financial firepower. If left in place, it could have led to a …
20th June 2022
We have previously argued that a mortgage rate of above 6% represents the threshold at which house price falls become likely. With rates recently rising above that level, we are therefore revising down our house price forecast. That said, the prevalence …
We think that stock markets in the emerging world will continue to struggle alongside their developed market (DM) peers over the next eighteen months or so, for four main reasons. The MSCI Emerging Markets (EM) Index has also struggled during the renewed …
Central and Eastern European economies are experiencing their worst bout of inflation since the late-1990s as surging food and energy prices have added to strong core price pressures across a broad range of goods and services. Monetary tightening cycles …
Egypt’s public debt dynamics look increasingly fragile due to a combination of the extremely short average maturity of its debt, rapidly rising yields, and a growing share of debt denominated in foreign currency. That said, for now, there are reasons to …
Left-wing Gustavo Petro’s win in the second round of Colombia’s presidential election is likely to spook investors and trigger a sell-off in the country’s financial markets. We suspect that Petro will still pursue moderate fiscal austerity, but not enough …
French President Emmanuel Macron faces five difficult years after losing his absolute majority in parliament. Proposed reforms, including to pensions and benefits, will be diluted if they happen at all, and the result suggests that the “extreme” parties …
The best way for the ECB to contain peripheral bond spreads would be via a new programme of unlimited, flexible bond purchases. This may be what happens eventually, but we suspect it will take longer than many anticipate to agree, meaning there is plenty …
17th June 2022
After a more severe downturn in 2020, Manchester office rental growth has caught up with other regional cities in recent quarters. While employment growth and occupier activity may remain fairly weak, tight new supply dynamics should see Manchester office …
The appointment of Erik Thedéen as the new Governor of the Riksbank will only strengthen the relationship between the Bank and the financial regulator, and could result in more macroprudential powers being brought under the oversight of the Bank. It was …
We think the sell-offs in US government bonds and equities have further to run, and have revised our forecasts for 10-year Treasuries and the S&P 500 accordingly. US bonds and stocks have been volatile this week amid a raft of central bank decisions, …
We held a Drop-In yesterday to discuss recent developments in central banking and related financial market implications. This Update answers several of the questions that we received, some of which we couldn’t fit in during the event and some that we are …
Despite consumer confidence remaining extremely low, we now think household spending in the euro-zone will edge up in Q2. Excess savings and a tight labour market have helped to cushion the blow from higher prices and enabled households to release their …
The Bank of Japan gave no ground at all to bond traders today as it left all its major policy settings unchanged. Governor Kuroda was resolute in claiming that Yield Curve Control has no limits in his press conference. But the likelihood is that defending …
The Bank of Canada’s hawkishness, a widening of mortgage spreads, and news that at least one lender is restricting new loan applications suggest the outlook for house prices is worse than we previously feared. Lenders tripped over themselves to provide …
16th June 2022
Russia’s decision to once again cut supplies to Europe makes the region’s gas supply look increasingly precarious. The move will slow regional stock builds and keep prices historically high . Russia’s monopoly gas exporter, Gazprom, announced on Wednesday …
Strong demand for labour, not a lack of potential workers, has driven the euro-zone’s unemployment rate to a record low. Employment gains have been biggest in public services and we expect demand for labour to hold up even as economic activity softens …
Shortages of food supplies and surging prices have led some EMs to impose export restrictions on key agricultural products, a trend that threatens to become more prevalent and serve to keep prices elevated and inflation high. Some EMs are also attempting …
Robust Chinese refined metal output, alongside subdued domestic demand, has combined with constrained refined output elsewhere to provide greater export opportunities for China. But there are limits on the extent to which Chinese metal can fill the …
By raising interest rates by 25bps (basis points) today, from 1.00% to 1.25%, rather than by 50bps or the 75bps the Fed announced last night, we think the Bank of England is putting too much weight on the softening economy and not enough on surging …
India’s goods trade deficit didn’t widen in the immediate aftermath of Russia’s invasion of Ukraine – rather counter-intuitively for a major commodity importer. But that has now started to happen, and a closer look at the data suggests the deficit may …
Taiwan’s central bank today raised interest rates by 12.5bp (to 1.50%) and appeared to indicate that rates would be raised further this year due to concerns about rising inflation. But we think the tightening cycle will be gradual. The central bank was …
The latest data from Nigeria suggest that the economic rebound slowed further at the start of Q2, and we think that the recovery will remain lacklustre over the coming quarters. The weakness of the economy may give monetary policymakers second thoughts …
After the excitement of yesterday’s ECB emergency meeting and 75bp hike by the US Fed, the SNB kept its end up by unexpectedly raising its policy rate by 50bps this morning – its first rate rise since 2007. Given its history of unscheduled announcements, …
The recent falls in the Turkish lira have led to increased speculation that, with the CBRT showing no sign of willingness to raise interest rates, policymakers will be forced to turn to capital controls to prevent sharp and disorderly moves in the …
While the Brazilian central bank’s tightening cycle is drawing to a close, the statement accompanying yesterday’s 50bp increase in the Selic rate (to 13.25%) left the door open to additional hikes. With Copom sounding a little more worried about inflation …
The Fed’s larger 75bp rate hike came as little surprise to the markets following the worse than expected May CPI data and Monday’s tip-off in the Wall Street Journal. Our view that inflation will remain uncomfortably high and that the economy will avoid a …
15th June 2022
The prospect of even tighter Fed policy than we had previously envisaged (see here ) raises the risk of a worse outcome for the US economy and corporate earnings further down the line than we had assumed. So, we now suspect that the 10-year Treasury yield …
We think the Bank of Japan (BoJ) will widen the tolerance band around its 10-year Japanese Government Bond (JGB) yield target, and that the yield will consequently rise by around 25bp. But there is a clear risk of a larger and more disorderly sell-off …
The Turkish lira is once again depreciating sharply against the US dollar and we expect this to continue. We revise our forecasts for the lira and pencil in further substantial weakness by the end of 2022, to 24/$. The lira has plunged ~15% or so against …
The ECB’s press release following its unscheduled meeting fell short of announcing a fleshed out spread-fighting tool that could provide a permanent solution to the problem. Flexible PEPP reinvestments might buy policymakers a little time, but the new …
The closure of the Freeport LNG facility in the US, for up to six months, adds to concerns about Europe’s ability to fill its gas storage tanks ahead of winter. We always suspected that supply concerns would re-emerge this year and, as a result, we …
News that the ECB Governing Council is holding an emergency meeting today shows that policymakers are taking the threat of rising peripheral yields more seriously than they were last Thursday at their regular policy meeting. Ten-year Italian yields have …
The 5.2% increase in the minimum wage announced by the Fair Work Commission will directly lift the Wage Price Index by around 0.7%-pt. But the increase will also contribute to upward pressure on wage growth and inflation more generally. On that basis, the …
The prospect of tighter Fed policy than we had previously envisaged (see here ) presents upside risks to our forecasts for the 10-year Treasury yield as well as downside risks to our forecasts for the S&P 500. The moves in financial markets have been …
14th June 2022
Capital outflows from EMs appear to have eased over the past month, but rapidly tightening external financing conditions mean that this won’t last for long. Large outflows already seem to have pushed Turkey to the brink of a(nother) currency crisis, and …
We suspect that the spread between 10-year Italian and German government bonds would need to widen by another 100bp or so, to around 3.5%, to force the ECB to make a stronger formal statement of support for peripheral bonds. And even then, any initial …
A strike by truck drivers in Korea is causing significant disruption. Prolonged industrial action could add to strains on global supply chains and would lower Korean GDP. Even if the strike ends soon, there could be lasting implications if it causes …
A recent MSCI article speculated that real estate investment could buck the deglobalisation trend given distinct features of the asset class, though we are not convinced that will bring many benefits. We have been writing about the end of globalisation …
Leading indicators are pointing to a large fall in existing home sales. For example, the recent sharp decline in the NAR buyer traffic balance is consistent with a fall in sales to 4.5m annualised which, excluding the COVID-related dip of 2020, would …
Israel’s labour market has tightened significantly in recent months and while there is so far little sign of a burst of wage pressure coming through, this is likely to be in the pipeline and feed through into stronger core inflation next year. Alongside a …
