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Hawkish rates markets ahead of themselves

Our measure of global headline CPI-inflation rose further in September to 3.7% yoy but the 0.17pp increase was entirely due to the 0.27pp rise in CPI-inflation in developed economies to a 13-year high of about 3.9% yoy.

Headline CPI-inflation in EM economies was unchanged in September at about 3.3% yoy, with the fall in CPI-inflation in China and in particular India countering large increases in Latin America and Central Europe.

The consensus view is that the argument put forward by most developed central banks that high CPI-inflation will prove “transitory” has slowly but surely been losing credibility, even allowing for the definitional elasticity of “transitory”. The Norges Bank, Reserve Bank of New Zealand, Bank of Canada and Reserve Bank of Australia have already taken action.

Two-year government bond yields have risen rapidly in the past month in most developed economies. This suggests that markets increasingly think that CPI-inflation will remain sticky at high levels for the foreseeable future and that (most) developed central banks will have little choice but to start to or further tighten monetary policy in the near future.

Analysts’ consensus view, which we share, is also that the Fed will at its policy meeting tomorrow announce the start of QE tapering. Similarly analysts expect the ECB to announce a tapering of its asset purchases as its 16^th December meeting.

However, analysts are less hawkish overall than markets. Our view is of a (partly) self-defeating prophecy, with the surge in short-end bond yields having de-facto resulted in a tightening of monetary conditions, which in turn reduces the odds of central banks hiking rates as aggressively as currently priced in by markets.

We expect the Fed at its meeting tomorrow to once again put some distance between the start of the QE taper and the start of the rate hiking cycle. While US household consumption is now running slightly above its long-term trend there is still a $1.1 trn “pandemic shortfall”. Moreover, slower household consumption growth in recent months (albeit from a high level) has led to weaker demand-pull inflation and contributed to the fall in month-on-month PCE-inflation, in our view.