Traders are preparing for the Bank of England to lift its key rate by the end of this year as concern over the inflation outlook mounts. Money markets briefly priced in 25 basis points of tightening by the BOE’s December 2021 meeting on Monday before paring bets to about 18 basis points, according to sterling overnight index swaps. That compares with a key rate of 0.1% currently. The wagers come as two Bank of England officials moved to reinforce signals of an imminent rise in U.K. interest rates to curb inflation, now running at the strongest pace in more than nine years. Britain’s consumers face soaring prices for energy and goods heading into the winter season, due in part to shortages that resulted from the nation’s departure from the European Union. 

“We see the BOE jawboning in a bid to ward off the threat of inflation expectations becoming entrenched,” said Richard McGuire, head of rates strategy at Rabobank. “It seems remarkable to conceive of the BOE increasing borrowing costs as we head into Christmas.” Money markets see a further rise of at least 25 basis points by February next year, followed by an additional quarter-of-a-percentage point of tightening by May. Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action.

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FRANKFURT – The results of the monthly poll of financial market experts conducted by Germany’s ZEW thinktank is expected to show further pessimism as inflation and supply bottlenecks weigh on the minds of investors. The ZEW’s forward-looking economic sentiment indicator is expected to drop for a fifth straight month with a decline to 24.0 from 26.5 in September, according to economists. The current conditions measure is forecast lower at 29.5 versus 31.9 last month. Poll respondents have had a lot to consider about Europe’s largest economy: German headline inflation rose to 4.1% in September, the highest in nearly 28 Years; German industrial orders data for August released last week showed a monthly decline of 4%; and the country’s Ifo economic institute cut its forecast for growth this year 0.8 percentage points to 2.5%.

Nomura said, “Growth is moderating both in Germany and more broadly in the euro area, as the effects of pent-up demand post-lockdown fade. In our view, the slowdown in growth will likely negatively affect financial analysts’ assessment of the current economic conditions within the ZEW survey, as well as their expectations for future growth in Germany.” As is generally the case, the ZEW indicators were foreshadowed this month by the Sentix index. It showed a decline overall and in the outlook but improved opinions about the current situation. 

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Stagflation fears may be rising, but strategists at some of Wall Street’s biggest banks say it’s a good time to buy the dip in stocks. “Despite near-term uncertainty, we expect the equity market will continue to rally as investors gain confidence that the current pace of inflation is transitory,” Goldman Sachs Group Inc. strategists led by David J. Kostin wrote in a note to clients. Strategists at JPMorgan Chase & Co. led by Mislav Matejka concurred, writing that stagflation fears will start to fade. 

Jitters over surging prices and concerns that the post-pandemic rebound is now past its peak dragged the S&P 500 Index 5% below its September record last week, after almost a year without a correction of this magnitude. Persistent supply bottlenecks, along with a slowdown in China, have raised doubts about whether stock valuations can be stretched any further.  A Deutsche Bank AG survey of market professionals suggested that the majority of them see at least another 5% pullback in equities by the end of the year. There’s “a fairly strong consensus” that some kind of stagflation is more likely than not, according to the survey results published Monday.  Goldman and JP Morgan resoundingly disagree.

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Britain is headed for a clash with the European Union this week over the border controls in Northern Ireland, an issue that could erupt into a full trade war and threaten peace in the region. The U.K.’s Brexit minister David Frost on Tuesday will seek “a significant change” to the Northern Ireland Protocol, which governs trade flows with Ireland after Britain left the EU. “No one should be in any doubt about the seriousness of the situation,” Frost said in the text of a speech to be given in Lisbon on Tuesday. “That is why we are working to reflect the concerns of everyone in Northern Ireland, from all sides of the political spectrum.”

The rift threatens to erupt just as the government is struggling with a number of other headaches. But the prospects of reopening another fight with Brussels could help Prime Minister Boris Johnson nudge the narrative away from how Britain is reeling from a supply-chain crisis that Brexit has exacerbated. Britain remains at loggerheads with France over fishing rights, and U.K. ministers spent the weekend bickering about how to cope with a surge in energy prices. Concerns are growing about a major United Nations climate summit Johnson is hosting Glasgow next month. 

(Bloomberg – Continue Reading)