Understanding Deep Politics



By Philip Marey, US strategist at Rabobank

While European stock markets took a step back yesterday, US stock markets still managed to rise. The Euro Stoxx 50 lost 1.01%, but the S&P 500 gained 0.31%. Asia-Pacific stock markets are mixed this morning, and the 10 year US treasury yield climbed to 1.54% yesterday, but is moving this morning around 1.50%.

European natural gas prices rose as reports emerged that Nord Stream 2 could be shut down if Russia invades Ukraine.

Meanwhile, Biden said that he will not send troops to Ukraine to stop a Russian invasion. In Germany, Olaf Scholz was sworn in as the new German Chancellor, taking over from Angela Merkel. His coalition of Social Democrats, Greens and Free Democrats will replace the coalition of Christian Democrats and Social Democrats. While some coalition leaders want a tougher stance on Russia and China, Scholz has been more cautious. In an interview with ZDF television yesterday, Scholz said that a Russian invasion of Ukraine would trigger reprisals, but he declined to specify if halting Nord Stream 2 would be part of any response.

Note that the US wants the Germans to stop the new gas pipeline, which is awaiting certification by Germany, in case of an invasion.

Yesterday, the Bank of Canada left the policy rate unchanged at 0.25%. This was fully expected by analysts (22 surveyed by Bloomberg) and traders. There was no new Monetary Policy Report (MPR), no new forecasts, and no press conference. The statement was relatively similar to that accompanying the October 27th meeting but it was notable that “temporary” was dropped from the phrase “temporary forces pushing up prices” and the BoC also highlighted uncertainty as a result of the Omicron variant. USD/CAD caught a modest bid in the aftermath of the announcement and the January meeting-date CAD OIS dropped 5bp as the BoC left the door open to an April hike but didn’t shift to a likely January start date. We maintain the view that the BoC will raise rates 25bp at the April meeting followed by another 25bp in July. As we noted in our preview, the BoC will be hiking,not sprinting. For more details, we refer to Christian Lawrence’s Bank of Canada Post-Meeting Comment.

In Brazil, the BCB’s Copom unanimously decided to hike the Selic rate from 7.75% to 9.25% and frontloads the steepest hiking cycle of the monetary policy since 2002 and brings the Selic rate “significantly into restrictive territory”. The decision was in line with what we and the market’s late consensus had pencilled in. Moreover, the Copom foresees for the next meeting also another hike of the same magnitude. This statement sounded appropriately hawkish to us, and we believe the BRL can strengthen in the short run. The Copom justified this hiking pace due to a higher than usual variance in the balance of risks even though it does not compromise their price stability objective while allowing for smoothing economic fluctuations while fostering full employment. The newly revised relevant horizon inflation projections by the BCB hinge on a steeper Selic-rate path from the Focus survey (9.25% by end-2021, 11.75% during 2022, 11.25% by end-2022, and 8.00% by end-2023), worse inflation expectations (10.2% by end-2021, 5.0% by end-2022, 3.5% by end-2023), and a lower USDBRL starting point (5.65 rather than 5.60 in the previous meeting). Then, the Copom’s projections of CPI inflation are now 10.2% (from 9.5% before) in 2021, and 4.7% (from 4.1%) in 2022, and 3.2% (from 3.1%) in 2023.

On the one hand, the authorities still believe a (partial) reversal of the recent increase in the BRL price of commodities can help driving the inflation path to levels below the currently projected.

On the other, they are also concerned that inflation expectations remain misaligned with the 2022 target of 3.5% and fiscal risks remain creating an upward asymmetry in the balance of risks.

Going forward, we keep seeing the Selic reaching the end of the hiking cycle at 11.75% by end-22Q1, and the easing cycle starting in 22Q4, leading the Selic rate to reach 10.75% by end-2022 and 7.50% by end-2023. Next week, the minutes (Tue.) and the 21Q4 Quarterly Inflation Report (Thu.) should disclose more details on their outlook on inflation and state of the economy. This will be important as their current CPI inflation projections are conditioned on their 2022 GDP projections, which could be higher than what we and the market currently forecast. For more details, we refer to Mauricio Une’s BCB Post-Meeting Comment.

Tyler Durden
Thu, 12/09/2021 – 10:45

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