Weekly Market Outlook

Weekly Market Recap: BoC Exits QE, ECB Downplays Rate Hike Expectations

A jam-packed trading week with a lot of key data releases and meetings of major central banks. Australia core inflation spikes to 6-year high while US GDP growth eases to 2%. The Bank of Canada ended the QE in a surprise move, fueling expectations for a sooner rate hike. The ECB kept policy unchanged, while realizing that “transitory” inflation may last a little longer. Meanwhile, the BoJ still behind the curve.

AUD Core Inflation at 6-Year High

The RBA trimmed mean CPI jumped to 2.1% on an annual basis in Q3, the highest rate since Q4 2015, following a 1.6% rise in Q2. The index rose 0.7% in the July-September quarter.

The headline annual inflation rate eased to 3.0% in Q3 from a 12-year high of 3.8% in the previous quarter and below market expectations of 3.1%.

On a quarterly basis, inflation was up 0.8% in Q3, on rising construction input cost due to supply disruptions and automotive fuel prices which hit its highest in a half-century.

Weekly Market Recap - AUD inflation

The Reserve Bank of Australia will be meeting on Nov. 2 and markets are expecting the first rate hike in the light of the economic progress being achieved.

In October’s meeting, The RBA held interest rates at a record low of 0.10% and continued the purchases of government bonds at a trimmed pace of A$4 billion a week until at least mid-February 2022. Policymakers stated that the timing and pace of the economic rebound in Australia are uncertain and will depend much on the easing of restrictions. 

BoC Exits QE

The Bank of Canada decided in its October meeting to end the quantitative easing programme 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.

The central bank lowered its growth forecasts for 2021 and 2022. Now it expects the economy to grow at a slower 5% this year (vs 6% in the July) before moderating to 4.25% in 2022 (vs 4.6%) and 3.75% in 2023 (vs 3.3%). Regarding inflation, policymakers stated that main forces pushing up prices, including higher energy prices and pandemic-related supply bottlenecks, now appear to be stronger and more persistent than previously expected. Inflation will likely remain elevated into next year, and ease back to around the 2% target by late 2022.

The board judges that the economy continues to require considerable monetary policy support, retreating its commitment to hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s projection, this happens sometime in the middle quarters of 2022. With elevated inflation and steady economic growth, market participants are pricing in for a sooner rate hike.

ECB Realizes Persistent Inflationary Pressures, But No Rate Hike

The European Central Bank kept policy unchanged during its October meeting, and again pledged to keep interest rates at record-low levels until inflation rises back to the ECB’s 2% target. Policymakers also stated that they continue to judge that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the second and third quarters of this year.

ECB President Christine Lagarde pushed back against market expectations of interest-rate hikes next year even with inflation proving more enduring than previously anticipated. “While the current phase of higher inflation will last longer than originally expected, we expect it to decline in the course of next year.” Lagarde stated in the press conference.

Lagarde said that comparisons with global central banks is “odious”. She reiterated the bank is in no hurry to tighten its policy. Inflation was widely discussed during the meeting. The recent inflation spike due to ongoing supply disruptions has raised concerns about the central bank’s narrative that inflationary pressures are temporary.

BoJ Keeps its Ultra-Loose Policy

The Bank of Japan left its key interest rate unchanged at -0.1% and maintained the target for the 10-year government bond yield at around 0% during its october meeting by an 8-1 vote. 

In its quarterly outlook report, the BoJ slashed its growth projections for the current fiscal year to 3.4% from earlier forecasts of 3.8% made in July, due to sluggish consumption and a slowdown in exports and output as supply disruptions persisted. The board also revised inflation forecasts lower for the current fiscal year to 0% from earlier predictions of 0.6%.

For 2022 fiscal year, the central bank maintained its view the economy was headed for a moderate recovery, upgrading its growth forecast to 2.9% from 2.7% as vaccinations accelerate. While inflation projections for the year were kept unchanged at 0.9%.

Weekly Market Recap - BoJ Economic Forescasts

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