LONDON, September 8 (Reuters) – Markets are in for a busy week as the European Central Bank holds a critical meeting on whether or not to raise interest rates again as the economy falters, while the United States reports the latest publish inflation figures.
Rising oil prices could reignite fears of price pressure. Key UK jobs data and a G20 summit marked by the absence of Chinese President Xi Jinping are also in focus.
Here’s your week ahead with markets from Yoruk Bahceli in Amsterdam, Ira Iosebashvili in New York, Kevin Buckland in Tokyo, Li Gu in Shanghai and Amanda Cooper and Ahmad Ghaddar in London.
1/TOP A COIN
ECB rate hikes used to be a given for traders, but a year and 425 basis points later of rate hikes, those days are long gone.
Inflation has slowed to just over 5% from almost 12% last October, but is still too harsh for the ECB to ease up. However, economic activity is decelerating rapidly, signaling stagnation for the eurozone, and these record-breaking increases are weighing on financial conditions.
This conundrum has led traders to bet on about a 40 percent chance of a hike and a 60 percent chance of a pause when rate setters meet on Thursday.
Policymakers are sending mixed signals. The doves warn of caution; The hardest hawks say a pause is not a done deal but have not specifically called for a rate hike either.
The decision is a coin toss – either way, expect more volatility.
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2/ TRADE IN GOLDLOCKS
Equity markets are swearing by the Goldilocks narrative of decelerating inflation and resilient growth, bolstered by a US jobs report in August that showed labor markets are improving, but not at an alarming pace.
Wednesday’s August US inflation data, followed a day later by producer price and retail sales figures, are the next test.
A headline figure well above the 0.5% month-on-month increase economists were expecting could reignite inflation fears, while a sharp drop would likely spark fears that growth is slowing too quickly following the Fed’s rate hikes.
Goldman Sachs cut the odds of a US recession next year from 20% to 15%.
For now, those in Goldilocks’ camp seem right. Whether that will continue is another question.
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3/ CRACKS IN CHINA
China is under pressure to step up stimulus measures as investors are disappointed with moves so far.
Mainland stocks (.CSI300) suffered their worst session in weeks on Thursday after dismal trade data.
The economic woes have undermined the currency, which has languished on the weaker side of the key 7.3 per dollar line in offshore trading and resisted central bank efforts to prop it up with above-consensus official funding fixes.
Each data point is closely monitored. Next up this weekend are consumer and factory price data, with industrial production and retail sales due out on the 15th.
Another concern is rising tensions with the United States. Washington Debates Cutting Off Chip Technology Access to Huawei and SMIC; Beijing has reportedly banned the official use of iPhones.
Chinese President Xi Jinping will be spared hard questions at this weekend’s G-20 summit in India by not attending, another worrying sign of distancing between China and the West.
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4/ AND DOGS OF GENIUS
The focus of employment markets is on employment growth. Not so much in Britain, where wages are a far greater concern for Bank of England policymakers.
The unemployment rate is slightly above last year’s 48-year low, suggesting some moderation in the labor market, while basic incomes are rising at a record pace.
Workers saw real wages rise for the first time in two years, albeit by just 0.1%. Good news for those paying the bills, bad news for those trying to anchor inflation.
BoE Governor Andrew Bailey knows this all too well, having made headlines last February when he called for workers’ wage moderation as real wage growth slowed.
The question the BoE will have to answer on September 12 when the August jobs numbers are released is: how to put the inflationary genie back in the bottle?
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5/ Oil Rush
Brent crude broke above $90 a barrel for the first time since November 2022 as Saudi Arabia and Russia are expected to extend their voluntary oil cuts through the end of the year.
Both will review their decisions monthly to consider tightening cuts or increasing production depending on market conditions.
Analysts warn that further price hikes could face obstacles as demand is likely to fall as US refiners enter their September-October maintenance period and potentially higher supply from Iran, Venezuela and Libya.
Rising oil prices pose problems for the inflation outlook for policymakers confident that price pressures will ease quickly. At the end of June, the price of oil had fallen by around 17% over the year, and is now up around 4%, and rising.
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Compiled by Dhara Ranasinghe; Edited by Philippa Fletcher
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