Key events in developed markets next week

It looks increasingly likely that the Federal Reserve will wait until November before announcing the tapering of its QE asset purchases with the US experiencing a 'softish' patch as the resurgence of Covid and ongoing supply chain strains, production bottlenecks and worker shortages all act as a brake on growth. Inflation pressures are not showing any signs of easing though with annual rate of producer price increases pushing above 8% this week. Labour market strains are set to continue with a new record number for job openings. The competition for workers means the cost of hiring new staff is on the rise as wages are bid up and this has seen a rising number of people quit their job to move to a new one. This also means that firms are increasingly focusing on staff retention and implies the potential for broader pay inflation and a more prolonged period of above-target inflation readings.

The Bank of Canada is set to leave policy unchanged and it could also be a little less certain about the outlook for policy. Recent softer data and higher Covid case numbers are a concern while the forthcoming election means the Bank is likely to be even more circumspect. It also means that the BoC’s quantitative easing programme may continue for a little while longer although we would still expect it to be concluded by the end of 1Q 2022.

Next week we’ll get July’s GDP data and it’s likely to show a sharp slowdown in growth. That’s essentially what all the high-frequency data has pointed to – mobility data plateaued below pre-virus levels and aggregate card data stalled. There’s a tail risk of a decline in monthly output, though it would likely be small if it does. That’s because the recent rise in Covid-19 cases appears to have had only a small impact on consumer willingness to socialise and get out and about, even if worker shortages became a real issue for firms as self-isolation became more prevalent. Since then, there have been tentative signs of a slight improvement in activity for August. But overall, we expect further gains in GDP to be gradual from now on, particularly if negative headlines on the virus become more frequent, leading to a renewed rise in consumer caution into the winter. We expect the economy to recover to pre-virus levels around the turn of the year.