Central bank tapering will offer cues to markets on inflation expectations

The easing of supply disruptions caused by Covid-19 has has failed to ease pricing pressures

The US Federal Reserve seems ready to kick off an initial taper of its current $120 billion monthly bond purchase programme at its November meeting. Reuters

As we enter the final stretch of 2021, markets find themselves at a pivotal juncture.

We have spoken so much over the course of the year about how and, more critically, when central banks, particularly the US Federal Reserve, will kick-start their respective tapers of their massive ongoing quantitative easing programmes.

One of the themes around this was inflation expectations, which up until recently was dubbed as “transitory”.

As I have expected and long maintained, these price pressures are going nowhere except up – the unwinding of supply disruptions caused by the Covid-19 pandemic has not numbed pricing pressures – and global central banks are becoming jumpier around inflation rates.

If we focus on the US, Fed chairman Jerome Powell said: “The risks are clearly now to longer and more persistent bottlenecks and thus to higher inflation ... I would say our policy is well-positioned to manage a range of plausible outcomes ... I do think it’s time to taper and I don’t think it’s time to raise rates”.

In perhaps its strongest message, the Fed, however, seems ready to kick off an initial taper of its current $120 billion monthly bond purchase programme at its November meeting, which concludes with an announcement at 10pm UAE time on Wednesday.

With an expectation of a taper announcement of $15bn per month, we would also look for cues as to what the stance on future rates will be.

I have previously written that expectations are for the Fed to look towards the second quarter of 2022 as the earliest possible window for an increase, with another rise following in the same year.

Goldman Sachs wrote in a note to clients last week that it foresees a hike as early as July 2022, bringing forward its initial forecast by more than a year.

The expectation of an announcement on Wednesday has resulted in US Treasury yields picking up momentum and the dollar index – a measure of the value of the US dollar against a weighted basket of major currencies – has also strengthened.

The latest commitment of traders report – a measure of the long versus short positions in both currency and commodity markets – published on October 26 shows that the combined long speculative positions in the US dollar continues to grow and is at its highest level in two years.

Expect the US dollar to catch bids through the initial weeks of November and volatility to be rife in greenback-denominated asset classes.

Across the pond, we also have the Bank of England rate decision due on Thursday. Similar to the Fed, the BoE consistently raised inflationary pressures (inflation in the UK is almost double the current threshold of 2 per cent) and markets are pricing in a 15 basis point jump on Thursday.

The quarterly monetary policy report will also be released alongside the announcement, which will give markets a clearer insight into how the BoE has amended its inflation expectations.

Looking ahead, US earnings season continues and we cap off this week with the US non-farm payrolls report for October.

After a sub-par reading of 194,000 in September, payrolls are expected to come in at 415,000 and the overall unemployment rate is likely to trim to 4.7 per cent.

Further out, November 10 is the release of US inflation data. Year-on-year core consumer price inflation is expected at 4 per cent, while month-on-month inflation is likely to come in at 0.3 per cent.

Gold moved below $1,800 a troy ounce on the Dubai Gold and Commodities Exchange. The precious metal has come under pressure amid all the recent US dollar strength.

I expect volatility to continue for gold. While it may prove too premature to build positions in the precious metal considering all the key announcements coming up this week, I expect downsides to continue towards $1,720, where we would find initial support, followed by $1,680 levels where secondary support kicks in.

Gaurav Kashyap is head of futures at EGM Futures. The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Futures