Friday, December 8

That inflation headache

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A look at the day ahead in markets from Dhara Ranasinghe. Data this morning showing British inflation rose to a new 30-year high of 6.2% last month, is a reminder perhaps that tackling price pressures could require more not less monetary tightening.

While the Bank of England raised rates again last week to curb inflation, it softened its language on the need for more increases as households face a huge hit from soaring energy bills.

For some analysts, under estimating inflation trends longer-term by the BoE means long-dated British government bonds or gilts stand to significantly underperform German and US peers this year.

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Market focus will stay with Britain, with Finance minister Rishi Sunak due to give a budget update in parliament at around 1230 GMT. He’s expected to add to the support he gave households only last month to cope with energy bills.

No doubt central banks are in a bind. The Federal Reserve is adamant it will put battling inflation first with more US policymakers overnight calling for bigger hikes.

As a result, Fed funds futures suggest traders are anticipating more aggressive rate hikes ahead. Traders now see the federal funds rate rising to the 2.25%-2.5% range by year-end, higher than the 1.9% suggested by Fed forecasts last week.

Stock markets continue to take growing unease in bond markets over higher rates in their stride meanwhile. Asia equities have hit three-week highs, while European and US stock market futures are higher.

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Note, two-year Treasury yields are up 73 bps so far in March, set for their biggest monthly jump since 2004.

Maybe the stabilization in many financial markets is a reason to hope that investors are coming to terms with the prospect of higher rates. Time will tell.

Key developments that should provide more direction to markets on Wednesday: – Biden heads to Europe with more sanctions for Russia – – Japan’s 10-year bond yield rises to one-month high – Flash euro zone consumer confidence – NATO chief Stoltenberg press conference – Russian central bank deputy governor Russian Central Bank Alexey Zabotkin speaks to Duma – Fed speakers: Chairman Jerome Powell, San Francisco Fed’s Mary Daly – US new home sales data, 20-yr Treasury auction – Emerging markets: Croatia central bank meets

(Reporting by Dhara Ranasinghe; editing by Saikat Chatterjee)