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by Charalambos Pissouros

Weekly Outlook: Dec 16 – Dec 20: BoE, BoJ, Riksbank and Norges Bank Decisions

Following a very packed week, including the UK elections, the FOMC and ECB meetings, as well as a “phase one” trade deal between the US and China, the calendar remains busy this week as well, with four central banks deciding on interest rates: The BoE, the BoJ, the Riksbank and the Norges Bank. The only Bank expected to act is the Riksbank, which is anticipated to hike rates, while the others are forecast to stand pat. Thus, focus will fall on signals and hints with regards to their future course of action.

On Monday, during the European morning, we get the preliminary PMIs for December from several European nations and the Eurozone as a whole. The bloc’s manufacturing index is forecast to have risen, but to have remained in contractionary territory. Specifically, it is expected to have increased to 47.3 from 46.9. The services PMI is expected to have ticked up to 52.0 from 51.9, while the composite one is anticipated to have inched up to 50.7 from 50.6.

Eurozone PMIs

At last week’s ECB meeting, the Bank kept interest rates untouched, with the statement not deviating from the previous one. At the press conference, the new ECB Chief, Christine Lagarde, reiterated Draghi’s words that officials stand ready to adjust all their instruments as needed, and that the risks of the economic outlook remain tilted to the downside. That said, she added that the risks are less pronounced and that there are some stabilization signs in growth slowdown. Thus, a positive surprise in the PMIs would be in line with Lagarde’s view and may help the euro gain somewhat. On the other hand, a disappointment could increase bets over additional stimulus by the Bank in the not-too-distant future, and the common currency may extend Friday’s slide.

We get December preliminary PMIs from the UK and the US as well. No forecast is available for the UK indices, while in the US, the manufacturing PMI is expected to have held steady at 52.6 and the services one is forecast to have risen to 52.0 from 51.6.

On Tuesday, during the Asian morning, the RBA releases the minutes of its latest policy gathering. At that meeting officials held rates steady and noted that they decided to do so given the long and variable lags in the transmission of monetary policy. Although they reiterated that they will continue to monitor developments, including in the labor market, and ease policy further if needed, the aforementioned addition suggests that they were more comfortable on the sidelines than investors have previously believed. Thus, we will dig into the minutes to see whether this is indeed the case. Remember that at the November meeting, the message we got was that officials have taken the sidelines, but the minutes of that meeting revealed that there was discussion for further easing back then.

Later in the day, we get the UK employment report for October. The unemployment rate is forecast to have ticked back up to 3.9% from 3.8%, while average weekly earnings (both including and excluding bonuses) are anticipated to have slowed +3.4% yoy from 3.6%.

From the US, we get building permits and housing starts for November, as well as industrial and manufacturing production for the month. Housing starts are forecast to have increased somewhat, while building permits are expected to have declined slightly. Both industrial and manufacturing production are anticipated to have rebounded +0.8% mom and +0.7% mom, after sliding -0.8% and -0.6% respectively.

On Wednesday, Asian time, New Zealand’s current account balance for Q3 and Japan’s trade balance for November are coming out. New Zealand’s current account deficit is forecast to have slightly widened, while Japan’s small trade surplus is expected to have turned into a deficit.

During the European day, the German Ifo survey for December is coming out. Both the current assessment and business expectations indices are anticipated to have increased to 98.1 and 93.0, from 97.9 and 92.1 respectively, which would drive the business climate index up to 95.5 from 95.0.

From the UK, we get the CPIs for November. The headline rate is forecast to have slid further, to +1.4% yoy from +1.5%, while the core one is expected to have ticked down to +1.6% yoy from +1.7%. Despite uncertainty surrounding the political scene easing after the Tories’ victory at last week’s elections, slowing inflation may keep BoE policymakers on the dovish side.

Eurozone’s final CPIs for November are also coming out, but as it is always the case, they are expected to confirm their preliminary estimates.

We get inflation data from Canada as well. The headline rate is forecast to have increased decently, to +2.2% yoy from +1.9%, but no forecast is currently available for the core rate. The message we got from this month’s BoC gathering is that officials have quickly switched back to neutral, after flirting with the idea of easing at the prior meeting. Thus, accelerating inflation is likely to confirm their choice of taking their hands away from the cut button, and may prove positive for the Loonie.

Canada CPIs inflation

On Thursday, during the Asian morning, the Bank of Japan decides on interest rates. When they last met, Japanese policymakers decided to keep their ultra-loose policy steady, but in the accompanying statement, they altered their forward guidance to signal chances of a future rate cut more clearly. Instead of saying that the current extremely low levels of interest rates are likely to stay unchanged “at least through spring 2020”, they noted that short- and long-term interest rates are expected to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost. However, they also said that there has been no further increase in that possibility.

Japan CPIs inflation

Since then, both the National CPI rates remained well below the Bank’s objective of 2%. Specifically, the headline rate held steady at +0.2% yoy, while the core one ticked up to +0.4% yoy from +0.3%. Thus, it would be interesting to see whether policymakers will maintain the view that there is no further increase in that possibility, or whether they will strengthen their wording with regards to a possible rate cut in the months to come. As for our view, it remains the same as back in October. With little space to ease further, the Bank may decide to wait for a few months and perhaps rely on its dovish signals to do the work for now.

During the European day, the central bank torch will be passed to the Riksbank, the Norges Bank and the BoE. Getting the ball rolling with the Riksbank, at its previous meeting, the world’s oldest central bank kept its repo rate unchanged at -0.25%, but changed its forward guidance saying that the rate will most probably be raised to zero in December. Latest inflation data showed that the CPI and CPIF rates rose to +1.8% yoy and 1.7% yoy, from +1.6% and +1.5% respectively, while the core CPIF metric, which excludes energy, has ticked up to +1.8% yoy from +1.7%. Although GDP data still pointed to subdued economic growth in Q3, the qoq rate saw improvement from Q2, to +0.3% from +0.2%. So, having all these in mind, we expect Swedish policymakers to not hesitate, and push the hike button at this meeting. The big question in our view is whether they will signal more hikes in the months to come, or whether they will step to the sidelines for now and wait to see how economic developments will unfold.

Sweden CPIs inflation

Moving on to the Norges Bank, its last meeting was proven a non-event as the Bank kept its policy rate unchanged at +1.50% and noted that new information indicated that the policy rate outlook was little changed since September. It also reiterated the guidance that the rate will most likely remain at the present level in the coming period. Latest inflation data showed that both the headline and core CPI rates slid to +1.6% yoy and 2.0% yoy, from +1.8% and 2.2% respectively, while GDP data showed that the economy stagnated in Q3, after growing 0.2% qoq in Q2. All these confirm that the Bank’s latest normalization phase is over and thus, we expect officials to reiterate that rates are likely to stay stable in the coming period.

Norway CPIs inflation

Last but not least, we have the Bank of England. At its previous meeting, the Bank kept interest rates unchanged, but two members voted in favor of a rate cut. In the statement accompanying the decision, officials noted that if global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. They also added that provided these risks do not materialize and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.

UK CPIs inflation

Since then, the headline rate for October slowed to +1.5% yoy from 1.7%, while the core rate remained unchanged at +1.7%. GDP data showed that the economy stagnated in Q3 after growing 0.2% qoq in Q2, while retail sales for October contracted. Despite Brexit uncertainty receding after the Conservatives won last week’s election, the aforementioned data suggests that there the door to a rate cut is not closed yet. However, given that this will be one of the smaller meetings that are not accompanied by updated economic projections and a press conference by the Governor, we don’t expect any major changes in policy or the Bank’s language this time around. Officials may prefer to wait for more data releases before they decide which policy path they will take.

As for Thursday’s data, during the Asian morning, we get New Zealand’s GDP for Q3 and Australia’s employment report for November. New Zealand’s GDP is expected to have slowed to +0.4% qoq from +0.5%, something that would drive the yoy rate down to +2.0% from +2.1%. As for the Australian data, the unemployment rate is forecast to have remained unchanged at 5.3%, while the net change in employment is anticipated to show that the economy has gained 14.0k jobs after losing 19.0k in November.

Later in the day, we get the UK retail sales for November, and the US existing home sales for the same month. Both the headline and core UK retail sales are expected to have increased +0.3% mom, after sliding 0.1% and 0.3% the month before, while the US existing home sales are anticipated to have slid 0.2% mom after rising 1.9% in October.

Finally, on Friday, during the Asian morning, Japan’s National CPIs for November are due to be released. No forecast is available for the headline rate, while the core rate is expected to have ticked up to +0.5% yoy from +0.4%.

Later in the day, we get the final GDP data from the UK and the US. Both are expected to confirm their second estimates. From the US, we also get personal income and spending for November, as well as the core PCE index for the month. Income is forecast to have increased 0.3% mom after stagnating in October, while the spending rate is anticipated to have ticked up to +0.4% mom from +0.3%. The yoy core PCE rate is forecast to have held steady +1.6% yoy.

From Canada, we have retail sales for October. Headline sales are expected to have increased 0.5% mom, after sliding -0.1% in September. The core rate is forecast to have ticked up to +0.3% from +0.2%.


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