This week appears to be a relatively busy one, with three major central banks deciding on monetary policy. On Wednesday, we have the Bank of Canada (BoC), while on Thursday, we have the Bank of Japan (BoJ) and the European Central Bank (ECB).
Besides those central bank meetings, we also have earnings results from big tech firms. We start today with Facebook (NASDAQ:FB), we continue tomorrow with Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL), while on Thursday, it will be Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) releasing earnings.
On Monday, the calendar appears relatively light, with the only release on the agenda worth mentioning being the German Ifo Survey for October. The current assessment and business expectations indices could slide, driving the business climate index down to 97.9 from 98.8.
That said, bearing in mind that both the ZEW indices for the month fell by more than anticipated, we see the risks surrounding the Ifo survey as tilted to the downside. A negative surprise could confirm that the latest supply shortages have left their mark on Eurozone’s largest economy and may weigh somewhat on the euro.
In our view, any signs that the bloc’s economy has slowed somewhat recently will confirm the ECB’s stance to stay accommodative for longer than other major central banks, despite the rally in Euro-area inflation well above the bank’s objective of 2%.
With no other top tier on the agenda, market participants may look for new developments surrounding the broader market sentiment. They could also pay extra attention to the earnings releases, with Facebook being the highlight of the day.
The week is packed with earnings, with Microsoft and Google reporting on Tuesday and Amazon and Apple on Thursday.
For the last couple of weeks, the broader market sentiment has been supported by better-than-expected earnings results, with several major indices around the globe breaking key technical resistance zones and inching closer to their all-time highs.
A couple of them managed even to hit new record highs. Therefore, it would be interesting to see whether upbeat results from those tech giants will encourage investors to add to their risk exposures this week as well.
On Tuesday, the economic calendar remains light. We get the US Conference Board consumer confidence index for October and the new home sales for September. The CB index could slide fractionally, but new home sales are forecast to rise somewhat.
On Wednesday, the main event may be the BoC interest rate decision. At its prior gathering, the bank left the door for further tapering wide open, despite some participants expecting a delay mainly due to the economic contraction in Q2.
Even Governor Tiff Macklem said that he and his colleagues are moving closer to a time when continuing to add stimulus through Quantitative Easing (QE) won’t be necessary, adding more credence to the view that more policy withdrawal could be delivered at this gathering.
Since then, Canadian data have been coming in on the bright side, with the BoC’s Business Outlook Survey revealing that business sentiment hit a new record, the employment returning close to pre-crisis levels, and inflation accelerating even further in September.
In our view, this makes a case for another tapering move this week nearly inevitable and suggests a relatively sanguine language in the statement accompanying the decision.
With the QE tapering process expected to be over in December, anything suggesting that interest rates could start rising early next year could further support the Canadian dollar, which recently fueled the rally in oil prices.
Let’s not forget that Canada is the world’s fifth-largest oil-producing nation, while it holds fourth place in exports.
As for the rest of Wednesday’s data, during the Asian session, we have New Zealand’s trade balance for September and Australia’s CPIs for Q3. No forecast is available for New Zealand’s trade balance, while Australia’s CPI is expected to slow to +3.1% YoY from +3.8%.
The trimmed and weighted mean rates could inch slightly higher and remain below the lower end of the Reserve Bank of Australia (RBA) target range of 2-3%.
This is likely to add credence to the RBA’s view that interest rates are unlikely to start rising before 2024 despite market participants seeing the official cash rate hitting 0.50% by the end of next year, at least according to the ASX 30-day Interbank Cash Rate Futures Yields Curve.
As for the Aussie, slowing inflation could result in some selling. Still, bearing in mind that the currency is mostly driven by developments surrounding the broader market sentiment, we don’t expect a major trend reversal.
As long as investors generally remain optimistic, this risk-linked currency could stay in an uptrend mode. Any CPI-related retreat could be just a temporary correction.
In the UK, Chancellor Rishi Sunak will present the Autumn Budget. He is expected to set fairly tight limits for most areas of day-to-day public spending, as he seeks to lower public debt after a record surge in borrowing during the COVID-19 pandemic.
That said, according to late Saturday comments by finance ministry officials, he still plans a GBP 5 billion program to fund health research and GBP 3 billion of extra funding for further education.
So, although he may appear stricter this time around, we doubt that this could be the turning point for the pound. With a Bank of England (BoE) ready to hike rates to battle inflation, the British currency may continue trending north for a while more.
On Thursday, the BoJ and the ECB are due to release statements. The first one will be the BoJ during the Asian morning. With Japanese inflation near zero, well below the bank’s target of 2%, we don’t expect any material changes, neither to the actual policy measures nor the language in the accompanying statement.
Once again, the yen may not react to the outcome and stay driven by the yield differentials between Japan and other major nations. With the global surge in inflation triggering a rally in global government bond yields and the BoJ maintaining a ceiling to its yields, we do see the case for the Japanese currency to continue underperforming its other major peers.
Passing the ball to the ECB, we don’t expect any policy action from this bank either. However, it will be interesting to see what policymakers have to say regarding the continuous acceleration in inflation and the latest global supply shortages that have left their marks on the Eurozone economy.
At its previous meeting, the bank announced a “moderately lower pace” of PEPP purchases. Still, President Lagarde made it clear that this was not a tapering move and that when PEPP is over, they have all other tools available.
In our view, this may have been a hint that when PEPP is over, they could compensate by buying more through other schemes, like the Asset Purchase Program (APP). So, with that in mind, we believe that they will stick to their dovish stance, noting once again that the surge in inflation will be transitory.
We don’t expect them to risk sounding hawkish amid economic risks such as the bottlenecks and the slowdown in China. Let’s not forget that China is Eurozone’s largest trading partner. Therefore, a dovish ECB is likely to bring the euro under renewed selling interest, even if Eurozone’s preliminary inflation, due out on Friday, accelerates further.
As for Thursday’s economic data, the most important one may be the 1st estimate of the US GDP for Q3. Expectations are for a slowdown to +2.8% QoQ SAAR from +6.7%, but with the Atlanta Fed GDPNow model pointing to a +0.5% growth rate and the New York Nowcast model to a +3.8% rate, it’s hard to say where the risks of the actual forecast are tilted.
A negative surprise could raise concerns about whether the Fed could start raising rates as early as next year and may weigh somewhat on the dollar. The opposite could be true if the actual number is better than the consensus, despite indicating a slowdown.
Finally, on Friday, during the Asian morning, we have Japan’s employment data for September, the nation’s final industrial production for the same month, and the Tokyo CPIs for October.
Later in the day, we get Eurozone’s preliminary CPIs for October, alongside the first estimate of the bloc’s GDP for Q3, but no forecast is available. In the US, personal income and spending for September are coming out, alongside the core PCE index for the month, while we have the monthly GDP for August from Canada.