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Inflation genie out of the bottle: Five questions for the ECB

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October 25, 2021

By Dhara Ranasinghe and Saikat Chatterjee

LONDON (Reuters) – The inflation genie is finally out of its bottle.

Now investors are waiting to see whether the European Central Bank on Thursday admits that price pressures are too significant to ignore. They will also want an explanation of what that means for its ultra-easy policy stance.

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Big decisions on the future of the ECB’s pandemic emergency stimulus will wait until December. But with surging energy prices and supply bottlenecks, Thursday’s meeting should be anything but dull.

Here are five key questions on the radar for markets.

1/ What does high inflation mean for the policy outlook?

The ECB may acknowledge that a jump in price pressures is likely to last longer than anticipated, but the central bank is unlikely to abandon its dovish policy stance just yet.

Its 2023 inflation forecast is 1.5%, below the 2% target, and policymakers argue that tightening policy too early could hurt the economy.

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ECB Chief Economist Philip Lane has argued that the current bout of inflation in the bloc is not a trigger for monetary policy action as growth in services prices and wages remains weak.

“They have to be very careful they don’t scare the horses,” said Craig Inches, head of rates at Royal London Asset Management. “If they come out a little bit on the hawkish side, certain peripheral markets could start to struggle.” Graphic: ECB and markets, https://fingfx.thomsonreuters.com/gfx/mkt/akvezajzkpr/ECB%20and%20markets.JPG

2/ What about the mismatch between the ECB’s guidance and market pricing on interest rates?

Indeed, rate-hike expectations have shot up in recent weeks and markets are pricing in a 10 basis-point rate rise by the end of 2022.

This is out of sync with the ECB’s ultra-loose monetary policy stance and is a concern if higher market lending rates trigger tighter financial conditions.

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The aggressive re-pricing is mostly a spillover from a sharp readjustment in Britain and the United States where investors are now expecting tighter policy. Lane has already pushed back against the market pricing; ECB chief Christine Lagarde may do the same on Thursday.

“We expect the ECB to remain dovish, while markets may continue to hedge against an earlier tightening by the ECB,” said Societe Generale senior European economist Anatoli Annenkov. Graphic: Global money markets raise central bank rate hike bets  Global money markets raise central bank rate hike bets&nbsp, https://graphics.reuters.com/GLOBAL-MARKETS/klvykzkylvg/chart.png

3/ Where will inflation settle once price pressures abate?

For some policymakers, changing inflation dynamics cannot be ignored. So what the ECB says about where it expects inflation to settle will be watched closely.

Bundesbank President Jens Weidmann, a critic of the ECB’s ultra-easy monetary policy, again warned of inflation risks last week as he announced his plan to step down early at the end of December.

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Euro zone inflation, at 3.4%, is at its highest level since 2008 and is expected to approach 4% by year-end. One key issue is what happens if inflation expectations rise above target and signs of second-round effects on wages emerge. Graphic: Eurozone inflation, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjolqonpr/eurozone%20inflation.JPG

4/ What about the risks to the economic outlook?

Supply bottlenecks and surging energy prices mean economic headwinds have grown stronger since the September ECB meeting.

Germany is already feeling the strain of supply-chain bottlenecks and its top economic institutes just cut their joint forecast for 2021 growth to 2.4% from 3.7%.

And while higher energy prices are an upside risk to inflation, they also squeeze consumers’ purchasing power and company profits.

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“We are still waiting for more people at the ECB to acknowledge those significant downside risks to growth,” BofA analysts said. Graphic: Supply chain shortages, https://fingfx.thomsonreuters.com/gfx/mkt/jnvwewkeovw/supply%20chain%20shortages.JPG

5/ Will we get a sense of what comes after the PEPP?

A decision on what comes after the 1.85 trillion euro pandemic emergency purchase programme (PEPP) expires next March is expected in December, and a debate on what will follow is under way.

The ECB should keep some of the flexibility offered by the PEPP when it returns to more conventional policy, ECB policymaker Francois Villeroy de Galhau believes.

According to one recent report, the ECB is studying a new bond-buying scheme to prevent market disruption when the PEPP ends, complementing an existing open-ended 20 billion euro-a-month asset purchase programme. Graphic: Life after PEPP, https://fingfx.thomsonreuters.com/gfx/mkt/zgpomrymxpd/life%20after%20PEPP.JPG

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(Reporting by Dhara Ranasinghe and Saikat Chatterjee; Additional reporting by Tommy Wilkes; Editing by Hugh Lawson)

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Asia braces for China data, oil nears 2021 highs

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January 17, 2022

By Wayne Cole

SYDNEY (Reuters) – Asian share markets got off to a cautious start on Monday as the U.S. earnings season loomed large and a slew of Chinese economic data were expected to show the deadening effect of coronavirus restrictions on activity.

A holiday in the United States made for thin trading, but that did not stop Brent crude from extending its bull run toward last year’s peak of $86.70 a barrel.

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MSCI’s broadest index of Asia-Pacific shares outside Japan was little changed, while Japan’s Nikkei bounced 0.8% after losing 1.2% last week

S&P 500 futures were flat, while Nasdaq futures slipped 0.1%.

The main feature of the market recently has been a rotation into value stocks and away from growth, particularly technology. The S&P 500 information technology sector, which accounts for nearly 29% of the index, has shed 5.5% this year.

With valuations still high, earnings will have to be strong to stop further losses. Overall S&P 500 earnings are expected to climb 23.1% this season, according to Refinitiv IBES, while the tech sector is seen up by 15.6%.

Companies reporting this week include Goldman Sachs, BofA, Morgan Stanley and Netflix.

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The market will be spared speeches from Federal Reserve officials this week ahead of their Jan. 25-26 policy meeting, but there has been more than enough hawkish comments to see the market almost fully price in a first rate hike for March.

There was also talk the Fed will start trimming its balance sheet earlier than previously thought, draining some of the excess liquidity from world markets.

Yields on cash 10-year Treasuries climbed to their highest in a year at 1.8%, while futures implied yield of 1.83% early on Monday.

“The implications of quantitative tightening continue to occupy markets as an earlier Fed balance sheet runoff looms,” noted analysts at Barclays.

“Meanwhile, new COVID lockdowns in China could re-aggravate global supply bottlenecks, while in both Europe and the U.S. the near-term growth outlook is now weaker and the 2022 inflation profiles higher.”

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Data out of China due on Monday are expected to show retail sales and industrial output slowed further in December. The economy is forecast to have grown 1.1% in the fourth quarter, though the annual pace is seen slowing to 3.6% from 4.9%.

BEWARE THE BOJ

A Bank of Japan (BOJ) policy meeting this week will bear watching given talk it will revise up its outlook for growth and inflation, while sources told Reuters policy makers were debating how soon they could start telegraphing an eventual interest rate hike.

While a move is unlikely this year, financial markets may be under-estimating its readiness to gradually phase out its once-radical stimulus programme.

This was one reason the yen has rallied, with the dollar slipping 1.2% last week to last stand at 114.29 but still well above major chart support at 112.52. [FRX/]

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The euro also gained 0.5% last week as the dollar eased broadly and was last changing hands at $1.1408. The dollar index was a shade firmer at 95.231, after touching a 10-week trough at 94.626 on Friday.

“We continue to think that the greenback will strengthen again before long, as we expect strong cyclical price pressures in the U.S. to mean the Fed tightens by more and for longer than investors currently discount,” argued Joseph Marlow, an economist at Capital Economics.

They see Fed rates topping 2.5% while the market has priced in a peak around 1.75-2.0%..

The risk of higher rates kept non-yielding gold restrained at $1,817 an ounce, while industrial and energy resources have benefited from resilient demand and limited supplies.[GOL/]

Oil prices have climbed for four weeks straight and such is demand that physical barrels of oil are changing hands at near record high premiums. [O/R]

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Early Monday, Brent had added another 51 cents to $86.57 a barrel and was approaching the 2021 top of $86.70 and the 2018 peak at $86.74. A break there, would take it to heights last visited in 2014.

U.S. crude also firmed 75 cents to $84.57 per barrel.

(Editing by Himani Sarkar)

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Japan machinery orders rise more than expected, govt welcomes pick-up signs

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January 17, 2022

By Daniel Leussink

TOKYO (Reuters) -Japan’s core machinery orders rose for a second straight month in November, government data showed on Monday, a sign that corporate appetite for capital spending remained resilient despite pressure from soaring raw material prices.

The gain in core orders, a key indicator of capital expenditure, could be a relief to policymakers hoping for corporate investment to trigger a private demand-led recovery in the world’s third-largest economy.

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Core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, grew 3.4% in November from October, rising for the second straight month, the Cabinet Office data showed.

It beat economists’ median estimate of a 1.4% rise and followed a 3.8% jump in the previous month.

However, Japanese firms could be cautious about boosting spending due to higher raw material, fuel and transportation costs that are sending wholesale inflation soaring and squeezing corporate margins.

“Firms may postpone capital spending from this quarter into the next fiscal year from April as uncertainty in the global economy has risen,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“Due to a decline in coronavirus cases and an easing of the (global) chip shortage, orders from manufacturers recovered up to November, but the outlook is unclear.”

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A government official confirmed firms’ appetite for capital spending faced risks from rising raw material prices, though he added companies were still likely to spend on investments to strengthen their businesses for the future.

Compared with a year earlier, core orders, which exclude volatile numbers from shipping and electric power utilities, jumped 11.6% in November, the Cabinet office data found.

By sector, orders from manufacturers rose 12.9% month-on-month, offsetting a 0.8% drop in those from non-manufacturers, the data showed.

The government raised its assessment on machinery orders for the first time in six months, saying they showed signs of picking up. Previously, it said a pick-up in orders was showing signs of stalling.

After contracting in the third quarter of last year, Japan’s economy is expected to return to growth in the October-December quarter.

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The economy is forecast to show growth of an annualised 6.5% in that quarter, thanks largely to a projected pick-up in private consumption, which makes up more than half the economy, after an easing of coronavirus curbs.

(Reporting by Daniel Leussink; Editing by Kenneth Maxwell)

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Credit Suisse Chairman Horta-Osorio resigns after board probe into breach of COVID-19 rules

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January 17, 2022

SINGAPORE (Reuters) -Credit Suisse Chairman Antonio Horta-Osorio, who was being investigated by the bank’s board for breaching COVID-19 quarantine rules, has quit with immediate effect and board member Axel Lehmann has taken over the role.

Horta-Osorio’s resignation comes less than a year after he was brought in to clean up a corporate culture marred by Switzerland’s second-largest bank’s involvement with collapsed investment firm Archegos and insolvent supply chain finance firm Greensill Capital.

“I regret that a number of my personal actions have led to difficulties for the bank and compromised my ability to represent the bank internally and externally,” Horta-Osorio said in a statement issued by the bank in the early hours of Monday.

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“I therefore believe that my resignation is in the interest of the bank and its stakeholders at this crucial time.”

In late December, Reuters reported in an exclusive story that a preliminary investigation by Credit Suisse found that Horta-Osorio breached COVID-19 rules a second time.

He attended the Wimbledon tennis finals in July during a visit to Britain when the country’s COVID-19 rules required him to be in quarantine, Reuters cited sources as saying. [L1N2TF08K]

Credit Suisse said Lehmann, the board and the executive board would continue to implement Credit Suisse’s strategy.

(Reporting by Anshuman Daga in Singapore, Shivani Tanna and Maria Ponnezhath in Bengaluru; Editing by Himani Sarkar)

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