Take Five: Take it away, Christine

September 3, 2021

(Reuters) – 1/EYES LIKE A HAWK

The European Central Bank meeting ends on Thursday, and a deluge of recent comments from policy hawks suggest it is set for a lively debate.

Euro area inflation has surged to a 10-year high at 3%. Markets may be willing to overlook noise around price pressures, generally viewed as temporary, but the hawkish chatter from German, Dutch and Austrian officials is reason for unease.

Economists reckon it’s still too early for the ECB to call time on emergency stimulus, but it could on Thursday agree to slow the pace of its bond buys. If markets interpret such a step as hawkish, the euro and bond yields will likely rise. ECB chief Christine Lagarde has a communication challenge on her hands.

– Euro zone inflation surges to 10-year-high, in headache for ECB

2/A STICKY PROBLEM

Just how sticky is the latest bout of inflation? Friday’s U.S. August producer price index data could provide some clues after July showed the largest annual increase in over a decade as inflation pressures undercut the Fed’s view that higher prices will likely prove transitory.

The big jump in PPI came as the swift economic recovery caused a mismatch between supply and demand, leaving producers grappling with low inventories, higher commodity prices, a global shipping container crisis and increased labour costs.

Some worry that persistent signals of rising inflation could push the Fed to roll back easy money faster than expected. Fed chair Jerome Powell has repeatedly said the current inflation burst is temporary and assured markets that policymakers would take a measured approach to tapering monthly bond purchases.

-U.S. producer prices at more than decade high; jobless claims fall

-Powell’s wait-and-see speech reassures some investors

3/THE PBOC PUT

While the Fed lays the groundwork for tapering, talk of easing has cushioned the disappointment from poor economic data in China, where the recovery momentum has all but run dry.

Trade data on Tuesday is likely to cap a run of weak releases, most recently showing manufacturing growth at a standstill last month while services contracted – all of which is beginning to make the yuan’s strength look stretched.

Economists, bouncing stocks and rallying bond markets suggest easing before the year is out, probably via cuts to banks’ reserve requirement ratio.

Beijing’s policymakers may need to pay special attention to property developers if they want to see growth and lending flowing again follow a crackdown on indebtedness that has set them and their lenders reeling.

-GRAPHIC-China likely to quicken fiscal spending, but policy rate cuts not on the cards

4/ THE ONLY WAY IS UP! (MOSTLY)

The Fed, ECB and Bank of Japan may be sitting on their hands as inflation ramps up, but developing economies most certainly are not as the coming days will again show.

Volatile emerging currencies can hugely amplify price rises, so central banks need to be on their toes. In Russia, where inflation is at a five-year year high, interest rates are expected to rise for a fifth time this year on Friday.

Peru could jack up its rates by 50-75 basis points on Thursday, along with fellow potential hiker Ukraine. Although Malaysia should stand pat that day, even eastern Europe’s lone dove Poland could sound more hawkish on Wednesday.

-GRAPHIC-For most emerging market central banks, the only way is up

5/ POLITICS & RISK

Commemorations of the 9/11 attacks on New York’s World Trade centre two decades ago take place in the wake of a chaotic pullout of Afghanistan that has raised concerns about fresh terror threats and brought a multitude of humanitarian and security challenges.

Latest events are a potent reminder that there is little sign of political risk abating, and some momentous shifts are underway from changing international alliances to political reorientations.

Not all will be as violent as the exit from Afghanistan.

But markets are paying closer attention to growing political risks: Japan’s struggling Prime Minister Yoshihide Suga has just decided to quit; Germans head to the polls in what could be a momentous Sept. 26 election as Chancellor Angela Merkel steps down after 16 years in power, and a November ballot in Chile could see the pendulum in the region shift further to the left.

– German SPD extends lead over Merkel’s sliding conservatives

(Reporting by Tom Westbrook in Singapore, Dhara Ranasinghe, Marc Jones and Karin Strohecker in London, Ira Iosebashvili in New York; Compiled by Karin Strohecker; Editing by Hugh Lawson)

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