This week saw increasing stagflationary fears grow. China’s GDP dropped below expectations and New Zealand saw a 10-year record high inflationary reading. Remember, that stagflation means low growth and high inflation. The major fear right now is that central banks will be forced to raise interest rates prematurely to curb rising inflation. This will hinder growth before it has properly bounced back post-COVID. Therefore, we remain at a crossroads. Will we see reflation or stagflation? One key market to look at is gold. If we do see a stagflationary environment, then gold would typicality stand to gain.

Other key events from the past week

  • NZD: Inflation fears, Oct 17: New Zealand Q3 inflation has risen at its fastest pace in 10 years. Annual inflation is up to 4.9% from 3.3% in the second quarter. This has caused the New Zealand bond yield to rise sharply higher. Expectations are now 50/50 for a 50 bps rate hike at the next RBNZ rate meeting.
  • China: Slowing growth, Oct 17: The latest GDP print showed a drop in growth from 7.9% to 4.9%. As China’s slow down in growth continues, this adds weight to the argument for a time of glib stagflation. As the world’s second-largest economy, China’s growth will be a key metric going forward.
  • GBP: Inflation appears, Oct 20: UK inflation Core y/y readings were high at 2.9%, but still below the 3.0% expected. However, the slight miss in expectations was enough to result in some mild GBP selling. Going forward the futures markets have priced in 4 rate hikes next year for the BoE. Surely that is too aggressive?

Key events for the coming week

  • Bank of Canada: Interest Rate meeting, Oct 27: At its last meeting, the Bank of Canada held rates at 0.25%. Asset purchases remained at $2 bln and they see rates rising around the second half of 2022. Will this still be the case?
  • Seasonal trades: DAX, Oct 23: The DAX has risen 7 times in the last ten years between October 23 and December 31. Will the DAX break higher again this year? Check out the strong seasonal pattern here.
  • European Central Bank: Interest Rate meeting, Oct 28: At September’s meeting the size of PEPP bond purchases was unchanged at €1.85 trillion and APP purchases continued at the speed of €20 billion a month. Will the ECB merge the PEPP program and the APP program together this week?

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