November 18, 2022

HEW: Hawks Don’t Tire Easily

  • Over the past week, markets were reminded that the Fed still wants to squeeze the economy. Meanwhile, high inflation and government emboldening of second-round effects show the UK still needs tightening, as does the EA, despite the revised HICP.
  • Next week is much quieter for data, with the flash PMIs for November a clear highlight. The success or otherwise of Black Friday sales is another critical event, but that is rarely immediately apparent. The BoE’s Thanksgiving gilt sale is a slight risk.

By Philip Rush

November 17, 2022
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EA: Huge Final HICP Print Trimmed Again

  • The final print of EA HICP inflation trimmed the flash again in Oct-22 to 10.6%. This revision was driven by Italy, as we previewed last week, but it remains far too high.
  • Underlying inflationary impulses have increased in some countries and are generally stuck near their highs. This resilience in the euro area remains a significant concern.
  • We fear a repeat of the average forecast drift pushing peak inflation higher, which would encourage the ECB to hike by 75bps again. So there are upside risks to our view.

By Philip Rush

November 17, 2022
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UK: Fiscal Stealth and Strategic Weakness

  • The new UK government’s widely-trailed fiscal plans are formally confirmed, with many tax thresholds and budgets frozen. The energy guarantee will rise by 20% in Apr-23.
  • Raising entitlements and the minimum wage by about 10% risks extending second-round effects while the ongoing fiscal strategy further erodes work effort incentives.
  • Plans for relatively deep fiscal restraint definitely beat no plan. Markets will probably tolerate the rolling horizons, but high issuance could jar with an inefficient QT strategy.

By Philip Rush