Impact of rising inflation on markets and monetary policy

It was a quiet start to the week in terms of news flow, which was reflected in market movements. After the big rally in bonds and stocks last week, yields are mostly higher globally to start the new week. The yield on US 10-year bonds rose by 9 basis points to 4.66%, returning to its level just before the release of payroll data on Friday. The US dollar is a little stronger, up 0.1% on the DXY Dollar Index and stock markets are struggling to find direction.

The S&P 500 index was little changed ahead of the close, after a 5-day streak of gains. Late in US trading, a survey of senior loan officers was released and showed tougher standards and weaker demand, although the proportion of US banks tightening standards on commercial and industrial loans to medium and large companies fell to 33.9%, from 50.8%.

Bank of Japan Governor Ueda spoke yesterday and indicated low chances of ending negative interest rates this year. With only two months to go, there were no surprises there. Potentially more relevant to the timeline towards policy normalization is the comment that they are monitoring next year’s spring wage negotiations, which may indicate that a more fundamental change in policy settings is unlikely until these outcomes are known.

In the context of sharp upward revisions to near-term inflation expectations, he said that “the probability of achieving the 2 percent price stability target appears to be gradually rising,” but “sustained and stable achievement of the price stability target has not yet been envisaged with sufficient certainty and is expected to rise.” Cash labor earnings data due today rose 1.2% year-on-year from 1.1%, showing why the Bank of Japan remains uncertain even as inflation rises in the near term.

Japanese 10-year government bond yields fell to 0.88%,

There was little market reaction to Ueda’s comments. Yields on 10-year Japanese government bonds fell to 0.88%, but largely reflect a catch-up as Japan returns from a long weekend. Among central bank governors, European Central Bank Governor Holzmann said we do not expect any interest rate cuts soon. Eventually it will happen but at the moment I don’t see it

. Holzmann is at the hawkish end of the ECB spectrum, so the comments were not seen as a confirmed reversal of cuts, with cuts priced in at 35 basis points by June. Holzman said: “We must be prepared again to raise interest rates if necessary, and certainly not declare victory too early.” The Bank of England’s chief economist, Hugh Bell, noted that UK inflation is on an end-of-year basis. “will see a further sharp decline” to levels more in line with other countries,

Which Bell said would make the UK seem less alien to other countries. countries. New Bank of England forecasts released last week show inflation will reach 4.8% in October from 6.7% as household energy bills move down another step. Huo said he did not believe that those forces that pushed inflation to levels “in some cases much higher” than those in the United States were very persistent. Looking ahead, Bell saw interest rates stabilizing somewhere between current “constrained” levels and “very low” pre-pandemic levels, but said it was too early to consider cuts at this stage.

German factory orders rose 0.2%

In overnight economic news, German factory orders rose 0.2% m/m in September versus consensus estimates for a 1.5% decline, but previous data was revised lower. It offset a 4.2% jump in foreign orders and a 5.9% drop in domestic orders, and that won’t change the narrative of a very slow German economy. Industrial production figures are scheduled for release today. In currency movements, the US dollar rose by 0.1% on the DXY index. The Euro and British Pound show little change from last week’s close, as they currently stand at 1.0722 and 1.2365 respectively. The dollar rose 0.3% against the yen, currently just below 150 at 149.91, supported by rising yields. The Australian dollar lost 0.3%, returning to just below 65 cents at 0.6492, after touching the highest level during the day at 0.6523. The New Zealand dollar fell by 0.5%.

Oil prices rose slightly at the start of the week, although gains have pared over the past two hours. Brent crude rose 0.6% to $85.4. Over the weekend, Saudi Arabia and Russia reaffirmed that they will adhere to oil supply restrictions of more than 1 million barrels per day until the end of the year.

Coming It’s RBA Day. NAB expects the RBA to raise interest rates by 25 basis points to 4.35% and maintain a clear hawkish bias. A rate hike is also the choice of 29 of 32 analysts in a Bloomberg survey, while markets expect a roughly 70% chance of a rate hike.

Some details about expectations in the post-meeting statement

The policy is expected to be tightened by 38 basis points by the middle of next year. There will be some details about the forecast in the post-meeting statement, but full details will have to wait until Friday. The key for markets, if the RBA raises rates by 25 basis points as expected, will be the strength of the guidance in the current paragraph. The current position “further monetary policy tightening may be needed” has not changed since May. It’s a public holiday in Victoria today.

Japanese earnings data, Chinese trade data and German industrial production round out the calendar. Market prices determine the value of new purchase orders from local industrialists for durable and non-durable goods. The Factory Orders report has little impact on the market as it records most of the information contained in the Durable Goods Orders report, which is published the previous week.

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