Key events in developed markets next week

The US economy is likely to experience 6%+CPI readings through 1Q 2022 and we forecast the economy to expand at a 6%+ annualized rate in the current quarter, which does raise the question – why is the Fed continuing to stimulate the economy?

There is a strong argument that it can stop immediately, but that is not the view of the Federal Reserve. However, the blowout CPI report has heightened market expectations of the Fed taking swifter action on policy normalization and we would not be surprised to see the Fed take the decision to accelerate its QE tapering path so that it concludes in Q1 rather than Q2 2022.

The October retail sales and industrial production reports are next week’s highlights and both should be strong. Retail sales will be lifted by the 6%MoM increase in new vehicle units sold – the first increase since April – while gasoline station sales will be boosted by the surge in gasoline prices. Elsewhere, rising household income and wealth should mean decent gains although we continue to expect a rebalancing trend away from the purchase of physical things that show up in retail sales, towards services, which are picked up in broader consumer spending.

Industrial production should see good manufacturing growth based on the ISM report already released. US oil and gas rig counts averaged 538 in October, up from 508 in September, which should lift the mining component. Utilities could be a drag given October 2021 was significantly warmer than usual meaning there is less demand for heating.

In Canada, another strong CPI reading and retail sales report will increase the implied probability that the Bank of Canada will soon raise interest rates for the first time this cycle. The BoC decided to end QE last month and the strong recovery and elevated inflation readings prompted them to signal the prospect of earlier monetary policy tightening. At the moment the market is pricing around a 12% chance of a December move with a 25bp hike fully priced for March. We see this as a likely outcome and expect 100bp of rate hikes from the BoC next year.

Before hiking rates for the first time, the Bank of England has made it clear it wants to get more clarity on what's going on in the jobs market now the furlough scheme has ended. Next week's data will give us further clues, but early evidence suggests there hasn't been a huge spike in redundancies now wage support has stopped. We are more likely to see some underemployment - perhaps early retirements or people working fewer hours than they'd like. But barring a huge negative surprise, recent comments suggest policymakers will proceed with a rate hike - and most likely at the December meeting (or at the latest February).

Inflation is only going in one direction for now, and we expect another jump next week on the recent increase in the energy price cap. We expect headline CPI to peak at around 4.5% next April.