Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 29th of September. The synchronised dance of oil prices and bond yields is continuing.
Crude oil prices have edged higher and so bond yields have moved higher. Central banks are supposed to look through one-off energy price shocks, muttering like the Vicomte de Valmont, it's beyond my control. However, if central banks deviate from that script and exhibit concern about inflation that is arising purely from an oil supply shock, then they must seek to control the only thing they can control, which means the non-oil economy.
The only plausible counterbalance to higher oil prices at a macroinflation level is to raise rates far enough so as to deliberately slow the non-oil economy and, in extremis, create a recession there. That implies that the more central banks express concern about oil prices, the more aggressive monetary policy will have to be and the higher oil prices go, the more likely it is that an oil-conscious central bank will have to push rates to recession-inducing levels. It is to be hoped that central banks are not going to go that far, but the language has been sufficient to bond the oil price and bond yields together in a rather unhealthy union.
The Reserve Bank of Australia raised interest rates, which was not a surprise to anyone. However, the pattern of Australian monetary policy differs somewhat from the policy errors that have been happening elsewhere. The Reserve Bank began the year with an accommodative policy stance and a desire to move policy to neutral.
After a pause to assess the damage done by the Gulf War, it has moved to take policy back towards a more neutral level. The European Central Bank was at neutral before raising rates and the US Central Bank has been verging on restrictive. The result is that the Australian tightening is likely to endure, whereas the European and US rate increases will come under pressure to be reversed next year.
From the United States we get August job openings data today. The hyper-fixation of markets on the labour situation makes the idea of job vacancies and job turnover very important. The appallingly low response rate to this survey makes this data frustratingly useless.
In other economies, a survey response rate this low would lead to a suspension of the data. The US labour market does seem to have been characterised by a low-hire, low-fire mentality. However, recent research is suggesting that employment of graduates from college is still holding up and there's no suggestion of AI damage there, for instance.
There's also the September Consumer Confidence Poll to be treated with the appropriate degree of scepticism. The UK's September British Retail Consortium Shop Price Index showed slower inflation in all of the key categories. In theory, the number was below consensus.
In reality, only four economists bothered to forecast this number, so the consensus is not really meaningful. Spanish preliminary September consumer price inflation data is due, with energy prices expected to increase the headline rate of inflation. That's all for today.
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