Economic Analysis

This week, concerns arose about a new type of coronavirus identified in South Africa that could reduce the effectiveness of vaccines. US President Joe Biden nominated Jerome Powell for a second term as Chairman of the Federal Reserve. The publication of the FOMC meeting minutes revealed members' readiness to accelerate the pace of tapering and raise prices earlier if inflation continues to rise above target. Several European Central Bank officials stressed the growing uncertainty about inflation expectations. In Germany, the Social Democratic Party, the Green Party, and the Free Democratic Party agreed to a coalition treaty that included a significant increase in public investment. Pressured by intense discussions about the Fed's tapering speed and the characteristics of post-PEPP buying, UST and Bund yields fell surprisingly on renewed concerns. regarding the Corona virus. The effect of a change in mood on corporate and stock market spreads. In the currency markets, the developments of COVID-19 have boosted the safe haven currencies, led by the Japanese yen. EUR/USD slipped back above 1.12 while USD/TRY settled at around 12.

The most important events expected this week:

OPEC+ outlines production strategy for 2022 (December 2)

- OPEC + will meet on December 2 at its regular ministerial meeting to assess market conditions and plan its production strategy for 2022. The only known advantage of the strategy so far is that the current reductions in production (about 4 million barrels per day) will be completed next year; The frequency of this reduction is not yet known. The cartel will likely settle on the current plan to add 400KB/day each month, at least in the first quarter of 22, as new COVID-19 cases rise affecting demand.

- The recent announcement of the launch of Strategic Petroleum Reserves (SPRs) by a number of countries, with the United States committing to allocate 50 million barrels, complicates the picture. It remains unclear how OPEC+ intends to respond to such an internationally coordinated move. The group could freeze any further production increases in order to try to offset the release, thus fully offsetting its beneficial effect on prices.

In our opinion, a decrease in the tapering frequency is unlikely for at least three reasons. First, despite the announcement regarding the release of strategic petroleum reserves, oil prices are still high. Second, maintaining a high level of compliance with the current production quota is becoming an increasing challenge for the cartel. Third, it is in Saudi Arabia's interest to avoid antagonizing the United States after weeks of diplomatic pressure exerted by the Biden administration on Riyadh.

Fitch downgrades Italy's sovereign rating on Friday (December 3)

- We expect Fitch to leave Italy's sovereign credit rating unchanged next Friday (at BBB- one notch above non-investment grade, with a stable outlook). Fitch's review follows Moody's decision not to update Italy's sovereign rating at the beginning of November, while Standard & Poor's raised the country's credit rating outlook (to positive from stable, on October 22), and DBRS revised the Italian rating trend to the top (to stable from negative, on October 29).

- Fitch is expected to raise the GDP growth estimate (especially for this year) from where it was after the previous revision (4.8% in 2021 and 4.3% in 2022). Fitch is likely to acknowledge the recent improvement in Italy's financial indicators - the country's public debt/GDP ratio is expected to start declining already this year (another increase was expected earlier). All of this should support a better country rating assessment, primarily related to reducing the risks arising from the impact of the COVID-19 crisis. Finally, Italy will benefit from the investment incentives offered by NextGenerationEU.

- However, we believe that Fitch may want to see additional evidence that Italy has put in place a credible strategy to put its public debt/GDP ratio in a clear downward trend in the medium term, especially for signs of confidence in Italy's growth medium term. Prospects increased.

Inflation (Eurozone) - Tuesday

Headline inflation is likely to rise in November to 4.5%. We expect the price increases to be extensive.

Core inflation is set to accelerate to 2.3% amid persistent imbalances in supply and demand and a basket effect that will raise the annual price change for holidays and travel-related items. Most of this latter effect should be reversed next month.

Energy prices will accelerate further, possibly adding 0.2pp to the headline inflation rate. Food price inflation is likely to add to overall price pressures.

- We expect it to be 4.5% peak headline inflation. A clear slowdown is likely to start in January.

Inflation (Germany) - Monday

We expect a further strong rise in annual inflation (national definition) to 5.4% in November, the highest reading since the summer of 1992. The annual rate is already likely to decline again early in the year.

The main driver in November is the primary impact from the value-added tax cut in the second half of 2020 and the lower energy prices last year.

- The HICP reading may rise to nearly 6% year-over-year, as the change in weighting will add to the base effect.

Household spending (France) - Tuesday

Household spending on goods is likely to decline 0.6% per month in October, after a slight decline in September. As a result, spending is likely to stabilize at 2% below the pre-pandemic level at the start of Q421.

Spending on home appliances, which was particularly strong in Q321 (+5.0% q/q), and spending on cars are likely to post the largest monthly decline.

In contrast, spending on services is likely to remain very high in October.

Inflation (France) - Tuesday

We expect consumer inflation to decline to 2.5% y/y in November after hitting its highest level in more than a decade (2.6%) in October.

- The main driver of the (moderate) decline in the annual rate will be the base effect on tobacco as the large monthly price increase recorded in November 2020 (nearly 5% per month) is out of the CPI.

The government-sponsored freeze in gas prices (after a 11% monthly rise in October) will also help contain the monthly increase in consumer prices.

America (manufacturing and services index) - Wednesday and Friday

We expect the ISM manufacturing index to rise to 61.2 from 60.8 in November. Regional surveys indicate booming manufacturing activity thanks to strong demand. The bottlenecks may ease slightly, but the labor shortage remains an urgent problem for manufacturers.

- We see ISM Services PMI declining to 65.5 in November from 66.7 in October. The decline will partly reflect the natural decline from very high levels, partly due to the uptick in COVID-19 cases from mid-November.

America (unemployment and non-farm payroll) - Friday

We expect non-farm payrolls to rise by 550K in November after a rise of 531K in the previous month. The unemployment rate is likely to decline to 4.5% while average hourly earnings growth is likely to remain high at 0.4% per month, reflecting the labor shortage.

- New COVID-19 cases were on the decline up to the employment survey reference week in mid-November (it's been up since then), likely boosting employment, particularly in leisure and hospitality after a spike in delta variable contagion that hit salary numbers in August and September , resulting in gains of only 483 thousand and 312 thousand, respectively. Incentives to actively seek and work in jobs are likely to have increased as well, as reserves are devoured following the end of boosted unemployment benefits in September, and childcare restrictions eased after a return to in-person education.