Key events in developed markets next week

The recent minutes to the Federal Reserve’s December FOMC meeting showed that officials really want to get the ball rolling on normalising monetary policy. They effectively admitted they got the inflation call wrong and now also recognise that the labour market is in a much tighter position than they had previously thought. Consequently, having suggested just nine months ago that it would be 2024 at the earliest before the first interest rate rise, they are now saying they are likely to hike rates three times this year and three times next!

The Omicron wave is obviously a concern, but the economy appears strong and inflation pressures are intense. Next week's numbers are set to show headline CPI breaking above 7% year-on-year- fast approaching a 40-year high – with the core rate rising well above 5% YoY. This will only intensify the pressure on the Fed to start hiking rates. Retail sales may be close to flat with falling auto sales dragging the headline number lower. However, this is supply related – due to a lack of cars to purchase – rather than weakness in demand. Moreover, industrial production should remain healthy.

The market is increasingly moving in the direction of a March interest rate hike. For now, we still favour May due to the lack of visibility provided by Omicron, but the risks are undoubtedly skewed towards earlier, swifter action from the Federal Reserve.

We expect a reasonable growth number for November, reflecting a decent month for UK retail and a bounceback in hospitality after a weak October. The vaccine push is also doing some of the work, and it’s worth remembering that health/social care growth has done a lot of the heavy lifting to get monthly GDP back to within a whisker of its pre-virus level. Of course all of this pre-dates Omicron, and December and January are likely to record negative growth readings – albeit perhaps only in tenths of a percent, and much less dramatic than the same time last year. Social spending slipped before Christmas, while worker shortages are causing firms real problems given sky-high Omicron prevalence.

Importantly, at least as far as the Bank of England outlook is concerned, we don’t expect these effects to be long-lasting. With headline inflation rates set to peak higher than previously expected – and given the Bank’s well publicised nervousness about what this may imply for inflation expectations – we think a February rate hike is close to a 50:50 call. For now though, we narrowly think policymakers will wait until May to gather a little more clarity on Omicron’s economic damage.