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LGT Navigator: The hawks are getting louder at the top of the Fed and the ECB

November 25, 2021

At the Fed's last interest rate decision, there were also voices in the monetary policy committee that called for a faster reduction of quantitative easing (QE) and that increasingly warned of the growing risk of inflation. This emerged from the minutes of the last interest rate meeting and could well indicate that the Fed could well step on the brakes earlier and more strongly next year.

The hawks are getting louder at the top of the Fed and the ECB

On Wall Street, the interest rate expectations of investors had already strengthened in advance of the FOMC minutes of the monetary policy decision of November 3, published last night, and caused caution. Ahead of today's Thanksgiving holiday, on which the stock markets remain closed, the stock indices trended sideways. The Dow Jones Industrial ended Wednesday trading at 35'804.38 points (-0.03%) and the S&P 500 closed +0.23% higher at 4'701.46 points. On the Nasdaq, the indices gained about +0.4%. In the run-up, the two IT groups Dell and Hewlett-Packard delivered positive quarterly results. The companies benefited from the trend towards home offices and increased IT demand.

Also in Asia, stock exchanges tend this morning more or less sideways, respectively, without a clearly visible trend. In Tokyo, the Nikkei 225 gains +0.7% and rises to 29'499.28 points, while the indices in mainland China slightly weaken. In Hong Kong, the Hang Seng index trades around +0.15% higher. 

FOMC minutes reaffirm recent rise in interest rate expectations

Members of the Fed's Monetary Policy Committee (FOMC) also discussed a faster pace of tapering their bond purchases, according to minutes from their last meeting on November 2/3. In early November, the Fed had decided to reduce its multibillion-dollar bond purchases by USD 15 billion per month, which will phase out the program in June 2022. Some council members, however, called for a higher monthly volume to be able to respond earlier with a first interest rate hike to the increasing risk of inflation. In the US, the annual inflation rate reached +6.2% in October, the highest level in 30 years. The Fed (as well as the ECB) still seems to assume that inflationary pressure will soon subside again due to temporary factors. However, there are more and more voices (as at the ECB) warning of a sustained rise in inflation.

Slightly stronger US economic growth in summer

According to revised figures, the world's largest economy expanded slightly more strongly in the third quarter than initially assumed. Quarter-on-quarter annualized growth of +2.1% was reported, compared with an initial estimate of +2.0%. Compared with the previous quarter, however, the growth trend has thus weakened significantly. In the second quarter, the US economy grew by +6.7% on an annualized basis.

Short-term data point to further recovery of the US labor market

Weekly initial claims for unemployment benefits fell to the lowest level since 1969. On a weekly basis, 71'000 fewer initial claims for unemployment benefits were registered. This brought the number of weekly initial jobless claims down to 199,000, significantly more than analysts had expected at 260'000.

Controversy over inflation outlook grows within the ECB

The reasons for high inflation are becoming more structural, ECB Vice President Luis de Guindos said. So far, the ECB's view has been that the rise in inflation in recent months is merely temporary. This has been emphasized several times, particularly by ECB President Christine Lagarde. Now, however, there seems to be growing concern within the ECB's governing body about a possible more sustained rise in inflation. The German ECB Director Isabel Schnabel also recently expressed skepticism about the ECB's current inflation outlook. 

ECB Director Fabio Panetta takes a different view. The central bank should not react hastily to the increased inflation, because a premature tightening of monetary policy would damage the euro economy. Currently, the euro area is facing “bad” inflation, as it is mainly the result of an external supply shock, which also weighs on economic activity. In contrast, “good” inflation is the result of robust domestic demand and high employment, which is still a long way off at present, the Italian explained.

German corporates more pessimistic again, according to Ifo

The mood among companies in Germany has clouded over again in November, according to the latest survey results of the Munich-based Ifo Institute. The highly regarded Ifo business climate barometer fell by 1.2 points to 96.5 points (consensus 96.7) compared with the previous month, marking the fifth monthly decline in succession. The mood continues to be burdened by the ongoing supply bottlenecks and now also increasingly by the fourth wave of the pandemic, commented the economic research institute. In the current survey, the approximately 8,000 companies surveyed assessed both the current situation and the outlook more unfavorably than in the previous month. The indicator for business expectations fell from 95.4 to 94.2 points and is thus at its lowest level since January of this year.

Economic Indicators November 25

MEZ Country Indicator Last period
00:00 US Thnanksgiving Holiday
08:00 GE GDP Q3 (Revision, q/q) +1.8%
08:00 GE GfK Consumer Climate (December) +0.9
09:30 SWE Riksbank Monetary Policy Decision
13:30 EZ ECB Minutes
14:30 EZ ECB President Lagarde Speach
18:00 UK Bank of England Governor Bailey Speach


Earnings Calender November 25

Country Company Period
SZ Swiss Life Investor Day
FR Remy Cointreau  H1


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