Weekly Market Outlook The US inflation to be released this week with another price rally expected in November. Central banks in Australia and Canada will meet during the week with no policy actions expected.
IMF Urges the Fed to Accelerate Policy Tightening
The US Dollar will be watching big data releases this week including inflation and trade balance. The latest report will probably show US inflation hitting new highs at 6.8% in November, highest levels since 1980s, and well above the Fed’s target at 2%. Core inflation, excluding food and energy prices, is also expected to print an annual increase of 4.9%.
Last week, Fed Chairman Jerome Powell stated that the bank could speed up the tapering pace, and it will be on the next meeting’s agenda in December.
Previous data showed US annual inflation rose to 6.2% in October, marking the highest inflation level since November 1990. Elevated inflationary pressures have pushed market expectations of the first US rate hike from 2023 into mid-2022.
The Federal Reserve announced in early November it will begin tapering the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities from the current $120 billion a month.
The International Monetary Fund urged the Fed to accelerate the tapering pace of asset purchases and bring forward the path for policy rate. The IMF highlighted the improving economic situation domestically moving back towards pre-pandemic levels and increasing inflation risks compared to other advanced economics.
Will the RBA Support the Aussie?
The Reserve Bank of Australia will be holding its policy meeting on Tuesday morning. With no policy changes expected from this meeting, all eyes will be focused on any signals about future policy moves.
The Aussie has been on the downside since late August against the greenback, weighed by monetary policy divergence and unclear rate path from the RBA side.
The bank discontinued the 0.1% yield target on April 2024 government bonds during its November meeting. The board also dismissed its prior statement that rates were unlikely to rise until 2024. These actions reflected the bank’s shift to a hawkish stance, fueling expectations for a sooner rate hike.
The Australian economy unexpectedly lost 46.3 thousand jobs in October to 12.83 million. The job market failed to recover from recent lockdowns and despite the accelerating vaccination rates in the country. Meanwhile, participation rate rose to 64.7%. The unemployment rate moved higher to 5.2% in October, from 4.6% and well above market forecasts of 4.8%.
However, the economy expanded 3.9% in the September quarter over the same quarter of the previous year. Annual inflation retreated from a 12.5-year high to 3% in Q3 from 3.8% increase recorded in Q2.
BoC: Another Hawkish Meeting?
The Canadian economy has been performing very well and kept its path to fast recovery. Inflation is at new highs, the labor market has almost recovered to its pre-pandemic levels. All is set for the Bank of Canada to signal upcoming increase in interest rates.
The Bank of Canada unexpectedly brought its quantitative easing programme to an end in its October meeting given the progress made in the economic recovery. The bank kept its overnight rate at 0.25%, as widely expected, and expects it to remain at the current level until sometime in the middle quarters of 2022 when the 2% inflation target is anticipated to be sustainably achieved.
There are no policy changes expected from December’s meeting as the recent slump in oil prices and the Omicron variant may push the bank to be patient with interest rates for the time being. However, the bank is anticipated to deliver another hawkish statement backed by an upbeat economic situation.
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