Inflation fears rattle markets

Markets nervous about inflation, Fed taper

Despite US bond markets being closed for Columbus Day, inflation nerves continued to rattle market nerves driven by energy prices, which surged once again overnight. Equity markets retreated and the US dollar resumed its climb as inflation looks less transitory and more embedded by the day. Goldman Sachs downgraded its US growth forecasts overnight, and the quarterly earnings season, which starts this week, has equity markets on edge over whether profit forecasts will be tempered for 2022 given the rich valuations prevalent in stocks everywhere. Add in the creeping, but relentless implications of the Fed taper and it is no surprise that equity markets remain on edge.

Emerging market currencies, especially those who are huge energy importers, remain vulnerable. The Turkish lira took a dive last night, USD/TRY rising through 9.0000. The add complications of Erdogan-omics mean USD/TRY could well start with a 10.0000 handle soon. USD/Asia is not immune either as regional currencies retreated overnight. The reality of the end of the Fed QE programme has yet to be priced into the region, complicated by surging energy prices that are priced and transacted in US dollars. Notably, the street’s favourite yield differential play, USD/JPY, rallied strongly again overnight, powering to 113.25 as of this morning. The disconnecting of the trajectory of US and Asian monetary policy will be one of the thematic trades of Q4. That won’t be just an Asia issue though. From a currency point of view, if you’re not tapering, you’re getting trampled.

The Bank of Korea blinked and held rates unchanged at 0.70% this morning. To their credit, they at least had started hiking in August and have the excuse of waiting to see that move’s effect before going again. The MAS in Singapore will likely remain unchanged on Thursday as well. Elsewhere in Asia, such as India, Thailand, the Philippines and Malaysia, central banks will have to either start selling foreign currency reserves or let their currencies tank. The latter will cause an imported inflation spike and make energy imports more expensive. Indonesia will probably be spared the blushes thanks to its still high (from a global perspective) yields and booming commodity exports.

Still, the news isn’t all bad. ASEAN reopening of international borders is accelerating with a slew of announcements over the past few days. You’ll need to be vaccinated of course, but it is clear that reopening tourism in the region has become an urgent priority ahead of the northern hemisphere winter. Given that Europe faces its own challenges regarding energy and heating this winter, it is an inspired move. Assuming that it doesn’t create a new wave of virus infections and gets rolled back, that could go some way to easing the impact of what will inevitably be a taper-inflated US dollar in Q4.

In other data, Australia’s NAB Business Confidence rebounded to 13 for September on the back of reopening expectations and booming commodity prices. The employment data later this week will have more impact, however. The Philippines trade balance held steady at -3.577 billion dollars with imports still surging by nearly 31.0% YoY as virus restrictions ease. That is probably a cause for unease for the BSP, which has interest rates set well below inflation like India. Capping the rise of USD/PHP at 51.000 is going to get a lot more challenging going forward.

Malaysian Industrial Production should show a restriction-easing rebound today while UK Employment and Average Earnings will be closely watched with markets in hike alert after some hawkish statements from Bank of England officials. Assuming that Britain can negotiate its impending energy and lorry driver-driven winter of discontent, sterling may be one of a select group of currencies that won’t suffer a US taper-trample in Q4.

India’s Inflation Rate and Industrial Production will take on more poignancy this evening, especially if inflation doesn’t fall back to 4.50% as hoped and remains above 5.0%. That will increase the noise for an RBI hike if only to keep the rupee above water. With reports of energy blackouts in northern India, and low coal stocks, India’s energy import bill is likely to skyrocket, and a weaker currency is the last thing it needs.

US markets return fully to work today, and we have three Fed officials speaking this evening. Watch out for more tapering noise. Most importantly, watch for the JOLTS Job Openings which are expected to remain at 10.9 million open positions. It would take a massive slump to change the taper outlook in my opinion, and 11 million job openings is inconsistent with a US Non-Farm Payrolls at 194,000 jobs added. Something must give; it won’t be immigration, so perhaps it will be higher wages. Transitory inflation anyone?

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