Will the rate of inflation in the euro zone accelerate?

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Will the rate of inflation in the euro zone accelerate?

Eurozone inflation is expected to hit a 13-year high in September, boosted by soaring energy costs and strong demand as economies reopen.

Data expected on Friday will show an annual rise of 3.5% in the benchmark consumer price index in the euro area, predicts Chiara Zangarelli, economist at Nomura. If so, it will be the fastest inflation since July 2008. It would also mark an increase from the August decade high of 3 percent, and put the inflation figure well above. the European Central Bank’s 2 percent target.

Soaring gas prices in Europe are contributing to rising consumer inflation as severe shortages have raised concerns about a shortage of supply during the cold season.

“Another harsh winter could keep prices high until 2022, pushing inflation up sharply,” said Fabrice Montagné, economist at Barclays.

The surge in wholesale gas prices alone could add up to 0.5 percentage point to euro area headline inflation in late 2021 and early 2022, Montagné predicted, meaning the inflation rate high would persist longer than expected.

The ECB expects inflation to fall to 1.7% on average in 2022 after peaking at 3.1% in the fourth quarter.

It was “certainly not the kind of inflation the ECB was hoping for,” Zangarelli said. With rising energy costs “undermining confidence and reducing disposable income, it could even have a negative effect on where inflation takes place further,” she added.

Upward pressure on prices was already expected before soaring gas costs, following strong business and consumer demand and limited supply as many global producers are still affected by restrictions.

An IHS Markit survey on Thursday reported the euro area’s fastest growing input costs in two decades in September as supply failed to keep up with strong demand and supply chain disruptions .

The survey also reported that an increasing proportion of businesses passed on their increased costs to customers through higher prices for goods and services. Valentina romei

Will the pound continue its rebound?

The Bank of England gave the struggling sterling a boost last week when it warned of spike in inflation at its last meeting. In particular, investors were surprised by the BoE’s claim that it could raise interest rates before its bond buying program expires, suggesting that a hike before the end of the l year is an external possibility.

Yet analysts are already wondering if hawkish market prices for interest rates – with the first rate hike expected as early as February of next year – will last long given the headwinds the economy is facing, such as as the recent surge in gas prices and the end of the government holiday scheme.

The minutes of the last Monetary Policy Committee meeting are unlikely to hint at a possible rate hike before Christmas, given the opinion of a majority of rate-setting makers that inflation will fall back after a winter surge, RBC Capital Markets said. strategist Peter Schaffrik.

“If indeed the minutes included miscommunication from the Monetary Policy Committee, we won’t have to wait long to hear from the MPC again,” Schaffrik said, adding that a speech by Governor Andrew Bailey Monday could offer an early chance to set the record straight.

Meanwhile, investors will also be watching Friday’s purchasing managers’ index for the manufacturing sector for any signs of weakening from a previous preliminary reading due to supply disruptions across many sectors.

The pound rallied last week to trade above $ 1.37 against the dollar, but any sign of a declining economy, or the BoE’s withdrawal from its hawkish stance would likely bring it to revisit its recent low of $ 1.3620. Tommy stubbington

How will Japanese stocks react to the replacement of Suga?

On September 29, Japan’s ruling Liberal Democrats will select a new prime minister to replace Yoshihide Suga – a key figure in the “Abenomics” project aimed at economic revitalization. Suga was popular among investors when he was chief secretary to the cabinet, but his year as an executive was marked by phases of selling Japanese stocks by foreign investors.

Four main candidates are vying to take over and, unusually, the race between them is genuinely unpredictable. Whoever wins will have to lead the party to a lower house election due before the end of November. Under Suga, the LDP was to lose a large number of seats, but not overall control. The favorites are Fumio Kishida and Taro Kono, two numbers the market may take some time to assess. The key for investors will be to what extent they believe national security concerns should be applied to protecting businesses from activists and foreign control.

Market action around the leadership vote could be choppy. Within minutes of announcing Prime Minister Suga’s resignation on September 3, Japanese stocks began to rise sharply. On September 14, the Topix benchmark was at its highest level in 31 years. Even amid the global market uncertainty caused by China’s Evergrande, Japanese markets have remained strong, largely because investors believe all candidates will promise huge stimulus packages.

Nomura analysts point out that Japanese stocks tend to outperform in the weeks leading up to the lower house election. Still, traders warn the markets are ripe for a pullback once the new prime minister is appointed. Leo Lewis