Global inflation pressures continue

KUWAIT: Inflation concerns continue to take center-stage as the Fed and other major central banks struggle to maintain a balanced approach. Although most central banks continue to hold the stance that inflationary pressures will be transitory, the market seems to be pricing in a longer period of higher prices. Evidently, the 10-year US treasury yield, traditionally a gauge of inflation expectations, jumped another 12 basis points the past week. Nevertheless, the Fed seems set to start tapering its bond purchases program as soon as November, and as mentioned expects higher prices to be transitory despite the recent surge in commodity prices amid supply chain bottlenecks and the rising cost of energy.

Market movement

The yield on the benchmark 10-year Treasury note has risen by 6 basis points in the course of the week to 1.63 percent after reaching a high of 1.70 percent, on fears that this year’s surge in inflation is likely to last longer than initially expected. Despite the increase in yields, the dollar dropped against most of its major counterparts last week amid profit taking and market consolidation. Furthermore, news from China that Evergrande was able to make a last minute payment to avoid default has lifted sentiments and pressured the dollar lower. The dollar index, which tracks the performance of the greenback against a basket of major developed economy currencies was down 0.37 percent on the week and closed at 93.61. The euro closed the week higher against the dollar at 1.1645 after reaching a high of 1.1669. Similarly, the pound found strength against the greenback as expectations that the Bank of England would raise rates surged. Meanwhile sterling’s upward momentum was capped by data showing another decline in retail sales in September, marking the fifth straight month they have fallen. While earlier declines were seen as a shift in spending away from goods toward services as the economy reopened, the most recent data was also affected by weakening consumer sentiment as the government ended its labor market support schemes and the shortage of truck drivers led to widespread shortages of various products, notably fuel. The pound managed to reach a high of 1.3834 and closed the week at 1.3756.

Economic indicators

US economic indicators for the week began with the month-over-month industrial production witnessing a drop of 1.3 percent versus an expected gain of 0.3 percent. Such a drop in production shows the heavy impact of high commodity prices on producers, pushing the cost on the consumer, which translates to higher inflation. Additionally, a report published by the Federal Reserve Bank of Philadelphia shows slowed manufacturing at 23.8 points, remaining well above the 0.0 mark indicating improved economic conditions. Furthermore, the manufacturing purchasing manager’s index (PMI) fell short of expectations at 59.2 versus the forecasted 60.5 points. The slowdown in manufacturing is partly due to hurricane Ida disrupting production and the rise of commodity prices. On the other hand, the services PMI came in at 58.2 points, exceeding the expected 55.3 points.

Kuwait

Kuwaiti dinar USD/KWD closed last week at 0.30155.