The Forex Week Ahead 11-15th December
The Forex Week Ahead North America The Federal Reserve meeting on Wednesday and top tier data in the form of CPI and retail sales will combine with three policy risks over the coming week. One is the never-ending tax policy dialogue with both chambers of Congress in conference hashing out a cohesive plan that settles sharp differences between the House and Senate versions of the Tax Cuts and Jobs Act. Two is geopolitical risk that has escalated largely as a product of actions taken by the US administration. Three is progress toward a spending and debt ceiling agreement by December 22nd that either extends funding on a temporary basis again or achieves a more durable solution. Why would the year end with anything less than the same sort of policy turmoil that has existed since the new year! The FOMC meeting on Tuesday into Wednesday culminates in the policy statement along with the Summary of Economic Projections that includes the revised ‘dot plot’, followed by Chair Yellen’s last full meeting press conference at the helm. Apart from likely kind words from the press during her final press conference, Chair Yellen is likely to continue to note that the FOMC consensus thinks soft inflation is transitory and that it expects a modest impact from fiscal policy changes. That view is supported by a slight improvement in inflation readings and somewhat improved odds of achieving tax reforms compared to the last meeting.
Data risk will be focused upon CPI on Wednesday before the Fed and retail sales the day after. November CPI could get a gas price boost to headline but core is expected to remain stable at around 1.8% YoY. As for retail sales, consensus expects a modest headline gain but that might be a tough target to defend. The report always includes an assessment of the critical Thanksgiving/Black Friday/Cyber Monday week but it would take a strong reading for core sales to drive a robust headline print. Other data risk will be relatively minor and particularly focused upon the industrial sector. Industrial output will be shooting for a third consecutive gain after a brief summertime swoon (Friday). The NY Fed’s Empire manufacturing survey arrives the same day but rarely informs the path to ISM as opposed to the Richmond and Philly metrics. The week starts with the JOLTS survey that includes job vacancies that remain at their highest since data began in 2000 (Monday).
Europe The Bank of England is nearly universally expected by economists and traders alike to leave policy unchanged with Bank rate left at 0.5%. Governor Carney has guided that a pair of rate hikes through to 2020 may be about the limit of the tightening cycle. More specifically, his exact quote about a month ago was: “We’ll see how the economy evolves. If it evolves broadly in line with our projections we would probably raise interest rates a couple of times over the next few years.” Tuesday’s CPI report may further inform policy risks but the expectation is for inflation to be topping out at about 3% and thereby averting the over-3 threshold that triggers some letter writing amid expectations for downward pressure on inflation in 2018. Topping inflation, by corollary, poses no pressure for a quick follow-up rate hike amidst ongoing Brexit negotiations. The ECB is also expected to jawbone while keeping policy measures intact. The central bank is unlikely to be terribly exciting to watch for some time as it moves into extending bond purchases through to next September at a diminished pace while guiding that rate hikes would follow well after and likely reduce reinvestment well after that if it follows the Fed’s path of reinvesting until the rate normalisation process is well underway. Data risk will also be a factor. Another batch of purchasing managers’ indices arrives for the Eurozone economies on Thursday and the key is whether momentum toward higher manufacturing, service and composite readings is being maintained as a hand-off into the new year. UK retail sales (Thursday), German ZEW investor confidence (Tuesday) and Eurozone add-ups for industrial output and trade round out the release schedule.
Asia Japan updates its Tankan survey on Thursday night. Will it continue to join the upward momentum in global manufacturing that the prior quarterly report for Q3 signalled ? To repeat, there is nothing uniquely American going on in global manufacturing circles. Everyone is bringing it home in a synchronous global upswing that has been in place for generally the past couple of years. Was Australia’s jobs slowdown in October (+3,700) an aberration? After a string of strong gains this year, October’s was a let-down but next Wednesday night’s tally will inform a trend. For China, the issue at hand in the near term is a series of routine data updates including a pending CPI reading this weekend. Next Wednesday night brings out retail sales and industrial output that will likely be 10-handled and 6-handled, respectively, and in keeping with the trends. It’s uncertain when we’ll get money supply and aggregate financing/credit figures, but they should be out before week’s end.