Intesa Sanpaolo: The ECB defends its forecast scenario, reiterating its expectations that inflation will fall in 2022.
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Weekly Economic Monitor – 29 October 2021
Intesa Sanpaolo – Research Department
The ECB defends its forecast scenario, reiterating its expectations that inflation will fall in 2022. The verbal reaction against rate hike expectations has not been emphasised – and it is hard to expect more as long as financing conditions are not compromised. No anticipation was provided on the direction monetary policy will take in December – except for confirmation that the PEPP will end on 31 March 2022, as almost everyone now expected.
The FOMC meeting of 2-3 November will have two tasks, one simple, the other more complex. The first will be announcing the start of the tapering, probably already in November. The second will concern communication with respect to the Fed’s reaction function in a context of mounting risks to the price front, showing openness to change monetary policy in response to different inflation and labour market adjustment scenarios. The FOMC’s bias will now turn to being restrictive, with the possibility of an earlier lift-off, in case of persisting and larger than expected inflation pressures.
The week’s market movers
In the euro area , the week presents few monthly data releases. Data on September industrial output in Germany and France will confirm the weakness of the manufacturing sector, challenged by persistent supply-side bottlenecks. Furthermore, in September, German orders are expected to rebound after plunging in August. Eurozone retail sales should lose some steam on a monthly basis, and unemployment is expected to be stable both in Italy and throughout the eurozone.
Busy week in the United States in terms of both data releases and economic events. The FOMC meeting should announce the start of the tapering, with the aim of completing the process by mid-2022. However, Powell’s press conference will be mostly focused on inflation risks and on the potential early start to the rates lift-off. The October Employment Report will dominate the data flow and is likely to confirm a moderately upbeat employment trend, a stable unemployment rate, and still solid wage growth. The manufacturing and services ISM indices should correct modestly in October, pointing to ongoing activity growth, persistent supply-side bottlenecks, and upward pressures on prices. The trade balance deficit is forecast to widen significantly in September.
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