Equities are mostly trading lower across the Far East amid concerns that China may tighten restrictions following reports of a number of Covid-related deaths across the country. The extent to which global economic activity will slow in response to tighter monetary policy also remains a concern for markets. On Friday, Boston Fed’s Collins reiterated her view that all options for the size of the next interest rate increase in December remain open, including the possibility of another 75bp rise. Over the weekend, however, Atlanta Fed President Bostic said that he favoured slowing the pace of interest rate increases.
It is a holiday-shortened week in the US, with the Thanksgiving holiday on Thursday and an early close for US markets on (Black) Friday which also marks the start of the Christmas shopping season. However, a number of US data releases are crammed into the first part of the week, including the flash PMIs, durable goods orders and new home sales reports and the final reading of the University of Michigan consumer sentiment survey, as markets continue to gauge how much further US policy rates will rise.
After 75bp increases at each of the last four meetings, which brought the Fed funds rate to a 3.75-4.00% range, financial markets expect a smaller increase at the next meeting on 14th December. Recent signs of softer inflation are likely to be welcomed by rate-setters but are not sufficient to prevent further policy tightening. Later today, US Fed rate-setter Mary Daly is due to speak on ‘price stability’ at an event hosted by the Orange County Business Council. In recent comments, Ms Daly ruled out the Fed pausing hiking and suggested that US policy rates could end up in a 4.75 – 5.25% range.
Questions over how far the ECB will raise interest rates also continue to rage, with markets pondering whether it will raise rates again by 75bp at its next policy meeting in December or decides on a smaller half-point increase. One reason for a smaller hike is that the economic downturn appears to be gaining momentum. At the same time, the latest inflation at 10.6% for October is uncomfortably high for policymakers, so another 75bp hike remains a possibility along with plans to reduce the balance sheet. A number of ECB officials are scheduled to speak today, notably Vasle, Holzmann, Simkus and Centeno, and markets will be watching for clues about the next policy move.
There is a lack of key economic data releases today, including in the UK, where the focus is limited to a speech by Bank of England policymaker Cunliffe at the University of Warwick. However, with the focus of the event on DEFi digital currencies, his comments may provide little to no insight into his views on the UK monetary policy outlook.
The risk-off tone has provided support to the US dollar at the start of the week with the Bloomberg dollar index trading 0.5% higher. GBP/USD is modestly lower as a result but continues to trade above 1.18. US bond yields meanwhile are marginally weaker with 10-yr yields below 3.80%.
