We don’t have any central banks deciding on interest rates this week. Still, we will get to hear from several policymakers, including Fed Chair Powell, European Central Bank (ECB) President Christine Lagarde, and Bank of England (BoE) Governor Andrew Bailey, who may provide extra clues with regards to their future course of action.
With regards to the data, the most important one may be the US CPIs for October, which are expected to accelerate further, adding more credence to the view that the latest rally may not be transitory after all. Australia’s employment report for the month is also due to be released.
Monday appears to be a light day in economic data releases, with no major ones scheduled on the calendar. However, we will get to hear from several key central bank officials, who could affect market expectations regarding monetary policy. Among them are Fed Chair Powell and BoE Governor Andrew Bailey. ECB President Christine Lagarde also speaks, but on Tuesday.
At last week’s gathering, the Fed began its tapering process as expected, and Fed Chair Powell said they would stay patient on interest rates. However, he did not exclude the possibility of raising them soon after the tapering is over if the economic outlook warrants so.
Thus, comments suggesting that this is still the case may allow market participants to bring forth their expectations over the Fed’s first rate increase, especially after the better-than-expected US employment report on Friday. According to the Fed funds futures, investors expect the Committee to hit the hike button in September 2022.
As for BoE Governor Bailey, we are eager to get some clarity on the “coming months” wording in last week’s decision statement. Remember, the BoE refrained from pushing the hike button, despite most market participants getting convinced that this could be the case.
Officials noted that this could happen over the coming months but did not give any further hints about what “coming months” means. It could mean that they may not hike in December either. February is still in the “coming months” spectrum. The pound tumbled after the decision, and it could continue to do so if Bailey continues to hint that they could stand pat next month as well.
Last but not least, we expect ECB President Lagarde to make another attempt to push back expectations over an interest rate increase next year. Remember that, at the press conference following the last decision, she noted that their analysis does not support that the conditions for liftoff will be met at the time expected by the markets, nor any time soon after that.
However, during the press conference, she failed to convince market participants, who pushed the euro up more than 100 pips against the US dollar. It will be interesting to see whether another and maybe a more substantial attempt will shake investors. If so, the euro is likely to turn south again, with EUR/USD perhaps falling below the critical support zone of 1.1524 soon.
On Tuesday, besides ECB President Lagarde’s speech, among other officials, we will get to hear again by Fed Chief Jerome Powell and BoE Governor Andrew Bailey.
As for the data, the only worth mentioning is Germany’s ZEW survey for November. The current conditions and economic sentiment indices are expected to have declined somewhat, to 18.0 and 20.0 from 21.6 and 22.3. This will be the 6th straight slide in the economic sentiment index and may add to concerns over how much Eurozone’s growth engine has been affected by the latest bottlenecks.
With such numbers, it will be hard for market participants not to listen to ECB President Lagarde and, instead, maintain their hike bets. We believe a weak ZEW report will make her work more straightforward and perhaps give another reason for EUR traders to sell.
On Wednesday, the main item on the agenda may be the US CPIs for October. Both the headline and core YoY rates are expected to have continued climbing higher. The headline rate is expected to hit +5.8% from +5.4%, while the core one is anticipated to have risen to +4.3% from +4.0%.
This is likely to add to the case that the rally in inflation may eventually not be transitory, and may add more credence to the view that the Fed will indeed need to start raising interest rates soon after tapering is over, especially if Fed Chair Powell keeps the door open in his Monday and Tuesday speeches.
The US dollar is likely to stay on the solid side, but we don’t expect any potential setback to be long-lasting as far as the equity market is concerned. We believe that if data continue to suggest that the US economy has fared better than many may have expected amid supply shortages, equities will continue cheering the economic resilience, despite the likelihood of more aggressive tightening by the Fed.
After all, equity investors may have already digested the idea of higher rates in the not-too-distant future. As for the rest of Wednesday’s data, ahead of the US CPIs, during the Asian session, we get inflation data from China as well. The CPI rate is forecast to have risen to +1.4% yoy from +0.7%, while the PPI is anticipated to have accelerated to +12.4% YoY from +10.7%.
On Thursday, during the Asian session, Australia releases its employment report for October. The unemployment rate is expected to have risen to +4.8% from 4.6%, while the net change in employment is forecast to show that the economy has added 50,000 jobs after losing 138,000 in September.
In our view, a 50,000 jobs gain is not encouraging news if we consider that apart from the 138,000 loss in September, the Australian economy lost even more jobs in August, around 146,000.
Thus, combined with a potential increase in the unemployment rate, we would expect market participants to push further back their expectations with regards to a rate increase by the Reserve Bank of Australia (RBA), and perhaps push the Aussie lower.
Remember that last week, the RBA appeared more hawkish than previously, saying that it could start raising interest rates in 2023 instead of 2024 as per its previous guidance. However, market participants were even more hawkish, anticipating a hike around the middle of next year and seeing rates hitting 1.25% by the end of the year.
Thus, the RBA’s view was a disappointment, and a soft employment report could add more credence. Later in the day, we get the preliminary UK GDP for Q3, alongside the nation’s industrial and manufacturing production rates for September.
Economic activity is expected to have slowed to +1.5% QoQ from +5.5%, while both the industrial and manufacturing production rates are anticipated to have slid to +0.1% MoM, from +0.8% and +0.5%, respectively.
In our view, such numbers would add credence to the BoE’s choice of staying sidelined last week and may increase speculation that the central bank may eventually deliver a rate hike in the first months of the new year instead of in December. This is likely to encourage some more GBP selling. The UK trade balance for the month is also coming out.
Finally, the only noteworthy releases on the agenda are the US JOLTs job openings for September and the preliminary UoM consumer sentiment index for November. The JOLTs openings are expected to have increased somewhat, while the UoM index is anticipated to have inched up to 72.5 from 71.7.