Race for the FED’s presidency on track

Last Wednesday, the Fed announced as expected that it would begin tapering its bond purchases from this month, noting economic activity and employment ‘have continued to strengthen’ and that inflation is ‘elevated’. Specifically, it will begin reducing its asset purchases by 15 billion dollars each month, that is 10 billion less in Treasuries and 5 billion less in mortgage-backed securities (MBS). The amount is significant, but one must not forget that the Fed currently is currently buying $120 billion of bonds every month. The FOMC did hold its key rates steady within the range of 0 to 0.25%, the level to which they had been lowered in March 2020 as the pandemic struck the United States. This initial tapering is a prerequisite for future rate hikes. Jerome Powell nevertheless kept a fairly prudent tone and indicated that the Fed was in no rush to raise rates. The institution fears that doing so too soon will harm the recovery of the job market. This means it probably was reassured by the latest figures published on Friday: 531,000 non-agricultural jobs were created. This was above analysts’ already high expectations of analysts. and the September figure was revised up, to 312,000 new jobs (compared to 194,000 previously). The unemployment rate dropped to 4.6% from 4.8% the month before. Wages also increased, by 4.9% over one year, up from 4.6%, thus fuelling still-rising inflation. Inflation figures are expected this afternoon. Analysts believe there will be a further increase of 0.6% in October against 0.4% in September, on an annual basis of 5.9% against 5.4% previously. At current levels, inflation in the United States is at its highest since 1990. Beyond monetary policy, it was politics that took centre stage. The race to succeed Jerome Powell is on. Even though the incumbent Fed Chair remains analysts’ favourite, president Joe Biden surprised everyone at the beginning of the week when he interviewed Lael Brainard. Ms Brainard, former professor at MIT and former economic adviser to Bill Clinton, is currently a member of the Board of Governors of the Fed. Under her leadership, the bank should adopt a more prudent approach to potential rate hikes than with Mr Powell. In any case, this is what the bond market seems to think, as the 10-year yield was down after the announcement. The suspense is not expected to last too long, with Joe Biden saying this month he would make a decision ‘fairly quickly’.

In the UK and Canada, and even as inflation continues to soar, central banks have gone against expectations and kept their key rates unchanged.  The Bank of England particularly thwarted the forecasts by leaving its base rate unchanged at 0.1%. Governor Andrew Bailey had prepared the markets to believe the bank would act quickly. The BoE has nevertheless confirmed it will tighten its monetary policy in the near future. The pound has lost considerable ground against the euro and the dollar as rates remained low. There was a similar decision taken in Norway, where the Bank of Norway held its rate steady at 0.25% while it suggested a further hike would come in December. On the other hand, the Czech central bank surprised analysts again on Thursday as it raised its main interest rate by 125 basis points to 2.75%, in a context, again, of high inflation.

European Central Bank did confirm, however, that it is sticking to the status quo for a while yet. According to statements by the governor of the Banque de France, the European Central Bank has no reason to raise its key rates in 2022. it was what ECB president Christine Lagarde said as well, as she considers that it’s very unlikely that there will be any hikes next year. This status quo in the eurozone us keeping the Swiss franc under pressure. The EUR/CHF pair is on the defensive and is closing in on 1.0505, an important technical support. The SNB is uncompromising, however, and maintains its interventions to curb the rise in the franc. This is evident from data on demand deposits released Monday morning. The latter reached all-time highs for the third consecutive week. The 1.24 billion increase last week brings the total to 4 billion for the past three weeks, the highest level since mid-May. The franc also continues to benefit from the solid Swiss economy. The Swiss job market continues to improve: the unemployment rate dropped to 2.5% in October, from 2.6% the previous month. It had reached 3.7% in January before starting this sharp decline.

Oil prices have started to rise again in recent days, driven by signs of recovery in the economy and ignoring a possible US intervention to increase the supply of crude.  At $84.50, the WTI is currently approaching the $85.41 it reached on October 25, the highest in seven years.