Flattening of Rate Curves in EM Far Exceeds the US

Early EM Rate Hikes Supporting EM Currencies

Powell Put in Play but Greater Challenges Ahead

Underneath the Bonnet of “sticky” Global Inflation

Macro Data Dog Not Wagging FX Market Tail

Founder

Olivier Desbarres

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4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

FX & Rates

Our measure of  headline CPI-inflation in developed economies rose further in September by 0.27pp 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.The argument put forward by most developed central banks that high CPI-inflation will prove “transitory” is losing credibility and 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.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. US household consumption is now running slightly above its long-term trend but 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.

Our measure of  headline CPI-inflation in developed economies rose further in September by 0.27pp 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.The argument put forward by most developed central banks that high CPI-inflation will prove “transitory” is losing credibility and 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.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. US household consumption is now running slightly above its long-term trend but 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. 

Hawkish Rates Markets Ahead of Themselves

US Treasury (10 Yr Generic)

Hawkish Rates Markets Ahead of Themselves