Aurelia Butler

Eurozone inflation rose to 5 per cent in December, setting a fresh record high since the single currency was created more than two decades ago and raising doubts over how quickly price pressures will ease this year.Driven by soaring energy and food prices, annual price growth in the euro area — as measured by the harmonised index of consumer prices — outstripped the expectations of economists polled by Reuters, who had on average predicted a 4.7 per cent rise, slightly down from 4.9 per cent in November. The surprise increase is likely to put pressure on the European Central Bank to reduce its monetary stimulus quicker than planned. Although most economists expect inflation to begin to ebb from January onwards, it is forecast to remain above the ECB’s 2 per cent target for much of this year.“This should be the peak, but headline inflation will stay elevated at least until late summer, especially as higher wholesale energy prices are passed through to retail consumers and other parts of the economy,” said Carsten Brzeski, head of global macro research at ING. “Several corporate clients have told us they will increase prices over the course of 2022.”Inflation has risen sharply in recent months as the eurozone economy rebounds from the shock of the pandemic, activity restrictions have been lifted and supply struggles to keep pace with demand, driving up energy costs and creating shortages of many materials. Eurostat said prices were up 0.4 per cent from the previous month, driven by an acceleration of price rises for food, alcohol, tobacco and other goods. Energy prices rose 26 per cent from a year earlier, a slight slowdown from the previous month.Excluding more volatile energy and food prices, core inflation was steady at 2.6 per cent. Most economists expect eurozone inflation to start falling in the coming months as the effect of Germany’s pandemic-driven temporary cut in sales tax disappears from the data, energy prices stabilise and global supply chain bottlenecks ease.However, European wholesale natural gas prices almost doubled to record highs in the run-up to Christmas and jumped again this week after supplies from Russia slowed. Supply chain bottlenecks continue to cause delays and higher costs for manufacturers, pushing up the price of many consumer goods.“The fast pass-through of surging wholesale costs into retail utility bills in Spain, and to a lesser extent Italy, despite government intervention, was the key upside surprise for us in December,” said Jacob Nell, head of European economics at Morgan Stanley. The ECB responded to mounting concern about rapidly rising prices last month by saying its €1.85tn pandemic-response bond buying scheme would stop net purchases in March as part of a “step-by-step” reduction of its quantitative easing policy.The central bank also sharply raised its eurozone inflation forecast to 2.6 per cent for 2021 and 3.2 per cent for 2022, while predicting it would drop back below its 2 per cent target next year.Investors continue to bet that high inflation will force the ECB to start raising interest rates from deeply negative levels earlier than it expects. Money market futures are pricing in a 0.1 percentage point increase in the ECB’s deposit rate in October.Jack Allen-Reynolds, senior Europe economist at Capital Economics, said eurozone inflation was likely to remain above 2 per cent “at least until the fourth quarter” and predicted that as a result the ECB would “begin to prepare the ground for tighter monetary policy in 2023”. More

TORONTO (Reuters) – The Canadian dollar is expected to strengthen over the coming year as global economic recovery continues from the COVID-19 crisis but gains for the currency could be kept in check by Federal Reserve interest rate hikes, a Reuters poll showed.The median forecast in a Reuters poll was for the Canadian dollar to strengthen 1% to 1.26 per U.S. dollar, or 79.37 U.S. cents in three months, compared to 1.25 in last month’s forecast.It was then expected to climb to 1.2350 in a year’s time.”Our expectation of Canadian dollar strength over the 12-month horizon is based upon our expectation of improved global growth conditions,” said Simon Harvey, Head of FX analysis for Monex Europe and Monex Canada.Growth will pick up after the first quarter of the year “as variant risk subsides,” Harvey added.Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to the outlook for the global economy. Oil has rallied 27% since December.Canadian provinces have announced in recent days restrictions to curb the spread of the Omicron coronavirus variant, mirroring moves in some other countries. Still, investors remain generally calm about the global economic impact of the variant after studies suggested the risk of hospitalization is lower.Also supportive of the loonie, the Bank of Canada https://www.reuters.com/markets/us/despite-omicron-bank-canada-likely-signal-earlier-rate-hikes-possible-2021-12-17 is likely to change its interest rate guidance this month so that it has the option to raise borrowing costs earlier than planned.Money markets expect Canada’s central bank to hike five times in 2022 and that the policy rate will peak over the coming years at 2%, the so-called terminal rate. That exceeds the 1.6% endpoint seen for the U.S. Federal Reserve but those expectations could shift.”We still think the terminal rate in the U.S. is going to be higher,” said Bipan Rai, North America head, FX strategy at CIBC Capital Markets.”Once we get more hikes priced in further out (the money market curve) for the Fed, that should translate into U.S. dollar strength.”The Canadian dollar was the only G10 currency to gain ground against the greenback in 2021, rising 0.8%.(For other stories from the January Reuters foreign exchange poll:) More

Retail sales, a proxy for consumer demand, in the 19 countries sharing the euro rose 1% by value on the month, defying expectations for a 0.5% drop in a Reuters poll of analysts.Compared to a year earlier, retail sales expanded by 7.8%, well ahead of projections for 5.6%, the European Union’s statistics agency said.Non-food sales rose by 1.6% on the month while car fuel sales fell by 1.5%, reversing their earlier trend. Among the bloc’s bigger countries, Spain and France performed above average while Germany was a drag on the retail expansion. More

Investing.com — As has been the case all week, Friday is all about jobs, with the official labor market report coming out at 8:30 AM ET. For those who prefer to focus on inflation – the Eurozone CPI hit 5% in December, raising the pressure on the European Central Bank to step off the gas. GameStop (NYSE:GME) stock is up sharply in premarket after announcing an NFT marketplace initiative, and China continues to grapple with the twin demons of a real estate crisis and Covid-19. Here’s what you need to know in financial markets on Friday, 7th January.1. All eyes on payrollsA week of labor market data reaches its climax with the release of the official government jobs report for the month through mid-December at 8:30 AM ET (1330 GMT).Economists expect a rise of 400,000 in nonfarm payrolls, a bounce from November’s abnormally low 210,000, but with ADP’s private payrolls report having come in at twice that number, the risk is for an upside surprise – all the more so since the cut-off date for the survey is before the first impacts of the Omicron strain of Covid-19.With the rest of the week’s data all pointing in the direction of higher wages, attention will also be focused on average hourly earnings, which are expected to accelerate to 0.4% growth on the month from 0.3% in November.2. Eurozone inflation and bondsAnnual inflation in the Eurozone hit 5.0% on the year, raising on the pressure on the European Central Bank to rein in a monetary policy that is still on its pandemic-era setting of maximum stimulus. November’s retail sales also surged past expectations but German and French industrial production fell on the month, a reflection of ongoing supply-chain issues.The European Central Bank has said inflation is close to peaking, but the rise in prices isn’t confined to volatile energy and food components, or to base effects. Core consumer prices rose 0.4% on the month and 2.6% on the year.German government 10-year bond yields, which hit their highest in nearly two years on Thursday, were flat, but spreads to peripheral bond markets continued to widen. The saving grace for the ECB is that there are fewer signs of wage pressures building in the regional economy.3. U.S. stocks set to open higher; NFT marketplace breathes life into GameStop U.S. stock markets are set to open moderately higher but all will depend on the payrolls report between now and the official open an hour later.Stocks had extended their declines on Thursday after comments by two regional Federal Reserve officials made hawkish sounding but largely familiar noises about the policy outlook.By 6:30 AM ET, Dow Jones futures were up 54 points, or 0.2%, while S&P 500 futures were up 0.3% and Nasdaq 100 futures were up 0.4%. Long-term government bond yields were steady after retracing their gains on Thursday – a suggestion that the Fed’s attempts to keep inflation expectations anchored by tough talk are succeeding.Stocks likely to be in focus later include GameStop (NYSE:GME) stock, which rose 17% in premarket trading after the meme stock company announced plans to launch a marketplace for non-fungible tokens. The combination of meme stock and crypto fever was enough to breathe fresh life into one of last year’s most active speculative assets, which has been in downward drift for the last eight months as its fundamentals stubbornly refuse to improve. Also in focus will be chip and phone makers, after Samsung Electronics (OTC:SSNLF) said it expects a 50% rise in annual profit in the last quarter of 2021.4. China urges banks to lend ease property loan squeezeChina’s central bank called on banks to boost property lending and eased a key restriction on real estate companies, according to Bloomberg, a sign that authorities are becoming increasingly concerned about the industry’s liquidity crisis.In previously unreported window guidance issued last month, regulators told banks to step up lending to developers after at least two quarters of consecutive declines, the agency reported, adding that the central bank will waive its ‘red lines’ on leverage ratios for loans that are used to fund consolidation in the sector. China’s real estate crisis is taking a back seat to its Covid-19 policy in terms of headline generation so far this year. Tech hub Shenzhen tightened mobility restrictions in an effort to clamp down on a local outbreak of the disease. 5. Oil pushes higher on supply concernsCrude oil prices continued to push higher amid concerns about the inability of OPEC and its allies to increase production as promised over the coming weeks. Global inventories are still below historic averages, despite a dip in consumption recently due to the cancellation of thousands of flights due to Omicron-variant Covid-19While there was some relief from the news that a major Libyan export pipeline has returned to normal operations, that doesn’t solve a global problem of underinvestment in the sector to maintain production rates. Baker Hughes’ drilling rig update later will cast light on the U.S. dimension of that problem.By 6:30 AM ET, U.S. Crude futures were up 0.6% at $79.97 a barrel, while Brent futures were up 0.7% at $82.80 a barrel.  More

BUENOS AIRES (Reuters) – Brazil’s real will stay backed up by a surprisingly good fiscal performance into the southern hemisphere summer lull as the campaign for October’s presidential election begins to gather pace, a Reuters poll showed.It oscillated around 5.60 per U.S. dollar in the fourth quarter and is expected to keep doing so, with subdued market action during the summer holiday season softening the hit of the greenback’s rise following the latest hawkish Federal Reserve minutes..According to the median estimate of 21 foreign exchange strategists polled Jan. 4-5, the real is set to strengthen 1.4% to 5.62 per dollar by end-March from 5.70 on Thursday, so long as Brazil’s fiscal problems remain under control.The country’s public accounts swung to a small primary surplus in the 12 months through November, thanks to stronger-than-expected tax revenues and slower expenditures resulting from strict spending rules.But investors worry the improvement may be only temporary after President Jair Bolsonaro’s administration tweaked the fiscal framework last year to gain budget leeway for social programs before the vote.Bolsonaro is trailing in election polls behind former President Luiz Inacio Lula da Silva, who has said he would seek to build a broad range of alliances in a bid to unite a divided country.”Having been on a positive trajectory since 2016 and into the pandemic, it looks as though Brazil’s post-pandemic policy mix could be heading in the wrong direction,” said Padhraic Garvey, ING regional head of research, Americas.”This can be categorised as a pre-election government looking to find loopholes in the constitutional spending cap and deteriorating fiscal risk premia forcing the central bank into even more aggressive rate hikes”.Brazil’s central bank is leading the most aggressive policy tightening drive in the world. It raised the key interest rate to 9.25% from 2.0% in 2021 and is maintaining an orthodox view this year to fight persistently high inflation.The real was forecast at 5.70 per dollar in 12 months, virtually flat compared to its value on Thursday at 5.70 and more solid than an expected 3.7% depreciation of the Mexican peso in the same period, to 21.3507 per dollar.The weaker outlook for Mexico’s currency rests on perceptions its central bank’s rate hike cycle is still too moderate when measured up against other countries like Brazil, despite a larger than expected https://www.reuters.com/markets/us/mexican-central-bank-hikes-rates-more-than-expected-tame-inflation-2021-12-16 move last month.(For other stories from the January Reuters foreign exchange poll:) (Reporting and polling by Gabriel Burin in Buenos Aires; Additional polling by Anant Chandak, Sarupya Ganguly and Indradip Ghosh in BENGALURU; Editing by Chizu Nomiyama) More