Rate hikes; coming to a country near you

Eight central banks raised interest rates last month

Chart of the Day

It was a busy day for central bank meetings yesterday, and several more hiked rates including those in the Czech Republic, Mexico and Columbia. One central bank, Denmark’s, cut rates, but that looks to be an anomaly. The key message is that despite the belief in 2020 that rates would remain very low for years, we appear to be heading for a scenario in which most major central banks are talking about hiking again (the ECB could be one exception). That could have important implications for financial markets, especially if those rate hikes are to try and squash inflationary pressures arising from supply issues rather than the more positive situation of strong demand. There are clearly lots of supply issues to be worried about, with the latest widespread electricity shortages in China the latest thing that will put upward pressure on prices.

Macro

German inflation rose sharply in September (core here is still August) - you can bet the Bundesbank would be hiking if it had the choice.

US initial jobless claims rose again last week, to 362,000. All is clearly not well yet in the labor market.

At current inflation rates, inflation-adjusted policy rates now range from a low of -5.3% in Poland to a high of 3.1% in China.

The eurozone unemployment rate fell to 7.5% in August.

Markets

The S&P 500 dropped by over 1% again yesterday. The bad news is it’s now the cyclical stocks underperforming.

The S&P defensive index is doing similarly badly as the cyclical index.

There’s not a huge amount of concern in terms of implied volatility though - maybe not much more weakness to come?

Reflecting China’s dire need for more coal to fuel power plants, the Baltic Dry Index has continued to rise sharply. Container freight rates are still rising too - watch out for more expensive Christmas gifts.

Gold received some respite yesterday as yields edged down. The previous relationship seems to leave room for gold to rise, but it would take a brave investor to do so with many central banks taking a hawkish turn.

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