The markets are at inflection points with the traders looking to position themselves ahead of the FOMC next week. Higher inflation in Australia will likely bring about a more hawkish RBA and today's expectations are for the Bank of Canada to tighten monetary policy too. The Bank of England is likely to be the first to raise rates and the UK’s budget today may give a hint of how much the government is willing to increase spending.
Market Brief
According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) increased 0.8% in the September 2021 quarter. Annual CPI inflation was 3.0% in the September quarter, with a mean inflation increase from 1.6% to 2.1%. The Trimmed mean and Weighted median are measures of underlying inflation which exclude large, one-off price impacts such as free childcare.
Both measures recorded their first annual movements above 2% since the September 2015 quarter. Michelle Marquardt, Head of Prices Statistics at the ABS, said the most significant price increases in the September quarter were new dwellings (+3.3%) and automotive fuel (+7.1%). A disruption in supply and shortages of lumber increased construction input costs, which were passed on to the consumer. As a result of rising fuel prices, the CPI's automotive fuel series reached the highest level in its half-century history during the September quarter.
The rising inflation could force the RBA to push towards a more Hawkish stance and the AUDUSD is reflecting the market's anticipation of the Aussie rising on rate hikes.
Germany's GfK Consumer Climate Indicator unexpectedly increased to 0.9 in November from 0.4 in October and beating market expectations of -0.5. While the positive mood will likely fade in the future if prices rise further, it is the highest reading since April 2020. Adding to the consumer confidence German import prices for both month-on-month and annually came in under expectations.
The better-than-expected German data this morning has given the euro some bullish momentum at the start of the London session. If this bullish reversal were to continue a break of the swing high would confirm higher highs and higher lows and the possibility of a rise to the daily double top at 1.9060 from the beginning of September would be a logical target.
Yesterday was bullish for US equities and the markets were more risk-on into the US session close. The Nasdaq came off from new highs to close after several of the big tech names fell sharply in the last hours of trading. Microsoft bucked the trend as their earnings came in better than expected. This morning the forex heatmap suggests a risk-off start to the day with flows going towards the yen and Swiss franc.
The GBPUSD continues to test the breakout levels ahead of the UK budget announcement later today. Around £30bln of spending has already been unveiled with wage increases for key workers and large infrastructure spending to level up the country baked in. The worry would be that the government decides to be fiscally responsible and tax those lucky enough to have made money during the last couple of years to pay for the spending. Which would amount to a drain on the economy and negate some of the spending increase due to the net effect of a transfer of wealth rather than an addition.
Oil is consolidating within a tight range and later today we get the EIA crude inventories. The prices of oil futures declined by 1% on Wednesday after API data indicated a rise of 2.3 million barrels in US crude inventories. Gasoline and distillate inventories increased despite forecasts were for a reduction.
This afternoon traders will likely trade the Bank of Canada’s latest policy decision. Canada's economy is back at full employment, and inflation is increasing, so the BoC is set to announce a further taper, reducing its asset purchases in half to $4 billion per week. No other changes are expected.