We standardise WoW price changes across different markets to allow for cross-market comparisons.
Jackson Hole confirmed our suspicions; the Federal Reserve (Fed) will have to hike more than the market expects. Chair Jerome Powell was not the only hawkish member of the committee last week; Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester noted interest rates could be held above 4% – higher than the current market implied terminal rate (3.85%). Limelight was stolen by the week’s end; the European Central Bank’s (ECB) Robert Holzmann called for 75bp to be ‘part of debate’ come September (when just 50bp was priced) while ECB Board Member Isabel Schnabel followed with equally hawkish rhetoric. ECB Chief Economist Philip Lane, however, was (as expected) more dovish calling for a softer hiking cycle, but we take that to mean 50bp, not 25bp. Arguments for the more aggressive path have helped equities weaken and bond yields rise in the US and Europe (Chart 2).
Concentrating on Europe, Ofgem announced their new energy price caps for UK households. The 80% increase will leave the average household cost at £3,500/per annum. More worryingly, updated estimates put future hikes in January at £5,400/pa (previously £4,500/pa) and in April at £6,600/pa. It means consumers will find it harder to avoid crippling costs, and more aggressive Bank of England hikes may only exacerbate the wage-price spiral. Meanwhile, on the Continent, one month ahead TTF natural gas prices plunged 20% as EU Commission President Ursula von der Leyen said the EU was looking to take urgent action. However, prices remain highly uncomfortable and could continue to rise – Russian gas flows along Nord Stream are set to pause tomorrow for three days of maintenance (Chart 3).
The Week Ahead
In Europe,the focus will be on August CPI outturns (Tuesday and Wednesday) and more specific comments from ECB speakers. On Eurozone inflation, the market is looking for further month-on-month rises in inflation readings, suggesting a YoY rise to 9%. This would be supported by the recent surges in electricity prices, even though transportation prices could be an offsetting factor. On ECB speakers, Henry expects them to add fuel to the need for faster tightening. That could see stress in credit spreads, particularly as we approach the Italian election. Meanwhile, there will also be the Bank of England Decision Maker’s Survey (Thursday) where we will see whether longer-term UK inflation expectations have continued to rise.
In the US, the most important data for the week will be non-farm payrolls (Friday) where Dominique is expecting another positive surprise relative to the consensus of 300k. Employment growth is returning to trend, but more slowly than consensus expects. She is also expecting a positive surprise in wages and a negative surprise on participation.
Ben Ford is Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.