Weekly Analysis
Typography

The elections in Austria could result in the euro-sceptic right accessing government......

in a coalition with the Popular Party, putting an end to the broad alliance with the Socialists.

Fed: likely hike in December, followed by gradual hikes in 2018. Uncertainty on the nature (transitory or structural) of the factors holding back inflation is still high. Data will tell!

- On Sunday, 15 October, Austria will vote to renew its Parliament. The recovery of the ÖVP popular party, currently well in the lead in the voting polls, has cooled concerns ahead of the election. Nonetheless, the euro-sceptic right-wing FPÖ party is still not out of the race. Survey data see it running neck-to-neck with the Socialists for second place, and at the present stage there seems to be a chance of the next government being supported by a majority coalition formed by the ÖVP and the FPÖ. During the election campaign, the two parties emerged as sharing the same views on several major themes, from immigration to tax cuts, and a re-edition of the broad alliance between the popular party and the Socialists seems more complex, following the ÖVP’0s shift to the right.

- The Catalan crisis spiralled this week following the non-official declaration of independence by the provincial government, which played for time before bringing it before the local parliament for ratification, and met with the central government’s requests for clarifications. Catalonia has five days to clarify whether it has actually made a unilateral declaration of independence, and if so, three days to revoke it. Failing this, the measures in place to protect the constitutional order will be triggered, and could result in the early dissolution of the province’s political bodies.


If, on the other hand, the Catalan President retracts, the coalition with the CUP would probably not survive, resulting in this case as well in early elections. The market impact has been very limited so far, although there are evident concerns among deposit-holders with Catalan banks.


The separatist agenda failed to meet with significant support at the international level, and seems destined to return within the realm of legality, albeit not so smoothly. As an incentive, the government has prospected the opening of a parliamentary debate on reforming the constitutions.

- The minutes of the September FOMC meeting confirm that a fed funds rate hike is very likely in December, while also revealing two different views on inflation and on monetary policy risks.


While consensus is unanimous on a positive assessment of the labour market and of the economy, there are two schools of thought on inflation. “Many” participants believe the low level of inflation is the result of transitory factors (mobile phone fares, exchange rate, health care prices), and that the further drop in slack will result in the inflation trend picking up.


“Some”, on the other hand, think there may be structural factors at play, and “several” also mention the moderate inflation expectations on the market. Diverging implications for monetary policy derive from these two visions. If the factors holding back inflation are temporary, it would be risky to delay hiking rates, given the lags with which monetary policy works. If, on the other hand, the headwinds are structural, or if the low level of inflation results in a lowering of expectations, then it would be risky to hike rates, as this may hinder the recovery of the price trend. Given the “general” opinion that inflation should gradually rise, and within the framework of a cautious risk management approach, the FOMC is inclined to hike in December, although data will remain decisive in dictating the pace of subsequent hikes.


Macroeconomic information over the next few months is unlikely to change the baseline scenario: data on economic activity should remain strong across the board, save for employment (influenced by the hurricanes). The evolution of the consumption deflator should be in line with stagnating core inflation, well below 2%, despite a modest recovery of the CPI (due to the different composition of the indices); the wage trend, on the other hand, on the rise since the summer, may indicate a shift upwards. To conclude, our view is that a rate hike in December is highly likely, but the subsequent upward path will remain dependent on the evolution of data: prices and wages will be the FOMC’s main focus, with possibly diverging indications at least in the opening quarter of 2018.


Appendix
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Source: BONDWorld

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