Will The Pace Of Eurozone Inflation Accelerate?

Eurozone inflation is expected to reach a 13-year high in September, boosted by surging energy costs and strong demand as economies reopened.

Data due on Friday will show an annual rise of 3.5 per cent in the eurozone consumer price benchmark, predicts Chiara Zangarelli, an economist at Nomura. If so, that will be the most rapid inflation since July 2008. It would also mark an increase from August’s decade high of 3 per cent, and put the inflation figure well above the European Central Bank’s 2 per cent target.

Soaring European gas prices are contributing to the rise in consumer inflation, as severe shortages have prompted escalating concerns about a supply crunch in the colder season.

“Another harsh winter could keep prices elevated well into 2022, pushing inflation sharply higher,” said Fabrice Montagné, economist at Barclays.

The wholesale gas price surge alone could add up to 0.5 percentage points to eurozone headline inflation in late 2021 and early 2022, Montagné predicted, meaning the high inflation rate would persist for longer than anticipated.

Line chart of Annual % change on harmonised consumer price index showing Eurozone inflation is set to climb further

The ECB expects inflation to decline to an average of 1.7 per cent in 2022 after peaking at 3.1 per cent in the fourth quarter.

This was “certainly not the sort of inflation that the ECB was hoping for”, said Zangarelli. With rising energy costs “undermining confidence and reducing disposable income it might even have an adverse effect on where inflation settles further ahead”, she added.

Upward price pressures were already expected before the surge in gas costs, following strong demand from businesses and consumers and limited supply as many global producers are still affected by restrictions.

An IHS Markit survey on Thursday reported the fastest growth in eurozone input costs in two decades in September, as supply failed to keep up with strong demand and supply chain disruptions.

The survey also flagged that a rising proportion of businesses had passed their increased costs on to customers through higher prices for goods and services. Valentina Romei

Will the pound continue its rebound?

The Bank of England gave struggling sterling a boost last week when it warned about surging inflation at its latest meeting. In particular, investors were surprised by the BoE’s assertion that it could push up interest rates before its bond-buying programme runs out, suggesting a rise before the end of the year is an outside possibility.

Still, analysts are already questioning whether the market’s hawkish pricing for interest rates — with the first rate increase priced in as soon as February next year — will last for long given the headwinds facing the economy, such as the recent surge in gas prices and the end of the government’s furlough scheme.

It is unlikely that the minutes of the latest Monetary Policy Committee meeting were intending to hint at a potential pre-Christmas rate rise, given the view of a majority of rate-setters that inflation will fall back after a winter surge, said RBC Capital Markets strategist Peter Schaffrik. 

“If indeed, the minutes did include a miscommunication on the part of the monetary policy committee then we won’t have to wait long to hear from the MPC again,” Schaffrik said, adding that a speech by governor Andrew Bailey on 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 a weakening from an earlier preliminary reading given supply disruptions in many sectors.

The pound last week recovered to trade above $1.37 against the dollar, but any sign of a flagging economy, or the BoE backing away from its hawkishness would probably lead to it revisiting its recent low of $1.3620. Tommy Stubbington

How will Japan’s stocks react to Suga’s replacement?

On September 29, the ruling Liberal Democratic party of Japan will select a new prime minister to replace Yoshihide Suga — a key figure in the “Abenomics” project aimed at economic revitalisation. Suga was popular among investors when he was chief cabinet secretary, but his year as leader was marked by phases of selling of Japanese equities by foreign investors. 

Four main candidates are in line to take over and, unusually, the race between them is genuinely unpredictable. Whoever wins will have to lead the party into a lower-house election that must happen before the end of November. Under Suga, the LDP was expected to lose a large number of seats, though not overall control. The favourites are Fumio Kishida and Taro Kono — both figures whom the market could take some time to assess. The key for investors will be how tightly they believe national security concerns should be applied to protecting companies from activists and foreign control.

The market action around the leadership vote could be choppy. Within a few minutes of the September 3 announcement of prime minister Suga’s resignation, Japanese equities began to rise sharply. By September 14, the benchmark Topix index was at a 31-year high. Even through 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.

Analysts at Nomura point out that Japanese equities tend to outperform in the weeks ahead of a lower house election. Still, traders warn markets are ripe for a pullback once the new prime minister is named. Leo Lewis

Source : https://www.ft.com/content/1028d3b9-d637-416c-b0d7-6e0df4ee73f3

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