Strong US Dollar

Weekly Market Recap: Soaring Inflation Urge Central Banks to Step In

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It has been a data jammed week with inflation figures in the spotlight as central banks retain their cautious stance due to the rising economic uncertainties impacted by the outbreak of Delta variant. Here are the main highlights on the economic calendar during the week: 

  • RBA’s Lowe expects temporary setbacks in Q3, and stronger economic growth next year. 
  • US inflation near its 13-year highs. 
  • UK annual inflation spikes to 3.2%. 
  • Canadian inflation rose faster than expected. 
  • New Zealand’s economy prints a record high economic growth of 17.4% annually in Q2.
  • The Australian economy lost 146.3K jobs in August, unemployment down to 4.5%. 
  • US retail sales unexpectedly rose in August. 

Will Inflation Support a Tapering Announcement Next Week? 

The annual inflation rate in the US slightly eased to 5.3% in August as expected, settling near its 13-year high of 5.4% recorded the previous two consecutive months. The monthly inflation rate was down to 0.3% from 0.5% in July, below expectations at 0.4%. The energy index increased 2.0%, mainly due to the rise in the gasoline prices, while the food index rose 0.4%, official data showed. 

Inflation - Weekly Market Recap
US Annual Inflation Rate

Separate data showed that US retail sales unexpectedly rose 0.7% on a monthly basis in August, following a 1.8% fall in July. Expectations were pointing to a 0.7% drop. 

The dollar index traded notably higher, approaching its 2-week highs. The dollar gains were supported by the significant inflationary pressures and the unexpected rise in retail sales last month, boosting expectations that the Fed will announce tapering measures in its meeting next week. The Fed is expected to reduce its monthly asset purchases, now at $120 billion, as the economy overcomes the pandemic crisis. However, the only concern is the job market that is still 6 million jobs away from full employment. 

UK Inflation at 9-Year Highs

The annual inflation rate jumped to 3.2% in August, from 2% in July and above market expectations of 2.9%. This figure marks the highest rate since March 2012. The recent highs were impacted by the government’s Eat Out to Help Out scheme in August 2020. A scheme that was used to support the economy reopening through discounted restaurant prices and reductions in VAT for the same sector. The monthly inflation rate increased to the highest in 3 years at 0.7%.

Inflation - Weekly Market Recap
UK Annual Inflation

The BoE board will be meeting next week as market participants are pricing in a reduction in asset purchases to contain the accumulating inflationary pressures. 

The Bank of England left policy unchanged during its August meeting, with policymakers reiterating that they do not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. Officials signalled that some modest tightening of monetary policy over the next two years will likely be necessary if the economy continues to improve. 

Will Inflationary Pressures Push BoC to Act Sooner?

Annual inflation accelerated to 4.1% in August from 3.7% in July, compared to market forecasts of 3.9%. This was the highest inflation rate since March 2003. Data detail showed that prices of seven of eight components rose. On a monthly basis, the CPI rose 0.2%, following a 0.6% rise in July and above market forecasts of a 0.1% increase. 

Inflation - Weekly Market Recap
Canadian Inflation Rate

The Bank of Canada kept its overnight interest rate at 0.25% in line with forecasts during its September’s meeting, and maintained its asset purchases at $2 billion per week, following a $1 billion cut in the previous meeting.

The bank expects the economy to strengthen in the second half of 2021, after a 1% contraction in the June quarter. Although the fourth wave of COVID-19 infections and ongoing supply disruptions could weigh on the recovery.

In its policy statement, the central bank judged the inflationary pressures as transitory, but their persistence and magnitude are uncertain and will be monitored closely. So, will recent data push the bank to reconsider its views on inflationary pressures in the coming months?

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