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by Charalambos Pissouros

Weekly Outlook: Dec 17 – Dec 21: Fed, BoE, BoJ and Riksbank Decide on Monetary Policy

Following a busy week, with Brexit staying on center stage and three G10 central banks (the ECB, the SNB and the Norges Bank) deciding on monetary policy for the last time this year, this week looks very eventful as well. Four more G10 Banks are holding their last meetings for 2018: The Fed, the BoE, the BoJ and the Riksbank. The Fed is widely anticipated to raise interest rates, with market participants on the edge of their seats, awaiting for the updated “dot plot”. We expect all the other Banks to stand pat, although given its guidance, there is the chance for a hike by the Riksbank.

Monday is a relatively light day, with the only release worth mentioning being Eurozone’s final CPIs for November. The final numbers are expected to confirm the preliminary ones and show that both the headline and core inflation rates declined to +2.0% yoy and 1.0% yoy from +2.2% and +1.1% respectively.

On Tuesday, during the Asian morning, the RBA releases the minutes from its latest monetary policy meeting. At that gathering, the Australian central bank decided to keep once again its benchmark interest rate unchanged at +1.50%, and although the accompanying statement included some more optimistic tweaks, the market reaction was far from suggesting a big change in market expectations with regards to a hike by this Bank. According to its latest quarterly Statement on Monetary Policy, the cash rate is expected to increase in 2020, and recent comments by RBA Deputy Governor Guy Debelle added more credence to the view that this Bank has still a long way to go before considering pushing the hiking button. So, having all that in mind, we expect the minutes to pass unnoticed once again.

Later, during the European day, we have the German Ifo survey for December. No forecasts are currently available but having in mind the ZEW results, which showed that the current conditions index fell, but the economic sentiment one rose, there is the likelihood for the Ifo indices to move in a similar fashion.

On Wednesday, the highlight is likely to be the last FOMC decision for 2018. This is one of the “bigger” meetings, where, besides the rate decision and the statement, we get updated economic projections and a press conference by Fed Chair Jerome Powell.

According to the Fed funds futures, the market assigns a nearly 78% chance that the Committee will raise rates by 25bps to the 2.25-2.50% range and thus, if this is the case, all eyes will turn the updated economic projections, and especially the new “dot plot”. Following the dovish remarks by Fed Chair Powell, the minutes from the latest FOMC meeting, and reports saying that Fed officials are considering whether to adopt a wait-and-see approach after hiking at their next meeting, the market priced out its expectations with regards to the number of hikes throughout 2019. Currently, the market is nearly pricing in only 1 hike.

Fed vs market rate expectations

Thus, the big question is: How many hikes will the new “dot plot” reveal? The September plot suggested 3 rate increases next year, but this seems as a very unlikely case now. Will the new one matches market expectations of 1 hike, or will we see just a downside revision to 2? The first case is likely to confirm further investors’ view, prompting them to buy stocks and sell the dollar.  On the other hand, although still a downside revision, projections of 2 hikes in 2019 would still be above market consensus and may result in the opposite market reaction.

As for Wednesday’s economic data, during the European session, we have the UK CPIs for November. The forecasts suggest that both the headline and core rates ticked down to +2.3% yoy and +1.8% yoy from +2.4% and +1.9% respectively. That said, given the latest tumble in oil prices, if the core CPI ticks down, the headline rate is likely to slide by more. With headline inflation returning to the BoE’s target faster than previously thought and the core rate moving further below that objective, investors may price further out their hike expectations, especially with all this uncertainty surrounding the Brexit landscape. However, given the Bank’s position that interest rates could move in either direction, even in case of a no-deal Brexit, pre-Brexit inflation numbers are likely to continue attracting less attention than usual.

UK CPIs inflation

Although a no-deal divorce could hit growth, further tumble in the pound could push inflation up again. The Bank would have to assess the possible trade off and if bringing inflation back down to target appears more urgent than balancing the hit to growth, then it may decide to hike. If the opposite is the case, a rate cut may be appropriate. Having said all that though, we still need to wait for Thursday’s BoE meeting to see whether the Bank still holds that view.

We get inflation data for November from Canada as well. Expectations are for the headline rate to have declined to +2.2% yoy from +2.4%, while no forecast is currently available for the core rate, which ticked up to +1.6% yoy in October from +1.5% in September. At its latest meeting, the BoC left rates untouched, but the accompanying statement had a dovish flavor compared to the hawkish one we got the previous time, prompting market participants to take their January-hike bets off the table. That said, Canada’s record employment numbers for November may have revived some hopes that officials could eventually push the hiking button at their upcoming gathering.

Canada CPIs inflation

With all this confusion with regards to the BoC future plans, inflation numbers have the potential to shed some light. We understand that the slowdown in the headline CPI may be owed to the tumble in oil prices, but if this is accompanied by a decline in the core rate as well, investors may be convinced that the Bank will refrain from acting in January. On the other hand, an upside surprise in this data set could encourage them to add to their bets.

On Thursday, it is the turn of three more central banks to decide on monetary policy for the last time this year: The Bank of Japan, the Riksbank and the Bank of England.

So, let’s get the ball rolling with the BoJ. At their previous gathering, Japanese policymakers kept their ultra-loose policy unchanged, maintaining short-term interest rates at -0.1% and the target of 10-year JGB yields around 0%. What’s more, officials reiterated that they intend to keep the current extremely low levels in interest rates for an extended period of time.

Since then, data showed that headline inflation accelerated to +1.4% yoy in October from +1.2% in September, but the underlying rate remained unchanged at +1.0%. On top of that, last Monday, GDP data for Q3 showed that the Japanese economy contracted -0.6% qoq. Thus, we see it unlikely for policymakers to proceed with any policy changes or tweaks at this meeting, and we stick to our guns that they still have a long way to go before considering a meaningful step towards normalization.

Now, passing the ball to the Riksbank, at its latest policy gathering, the world’s oldest central bank kept interest rates unchanged at -0.50% as was expected, and repeated that the repo rate will be raised by 25bps either in December or February.

Sweden Riksbank interest rates

Since then inflation prints for both October and November disappointed, with the core CPIF rate, which excludes energy, sliding to 1.4% yoy, after rising to 1.6% in September. So, it would be interesting to see whether the Bank will decide to refrain from hiking at this meeting, and note that interest rates could rise in February, or whether it will ignore the latest softness in inflation and proceed with pushing the hiking button. In our view, the first is the most likely outcome. Apart from the softness in inflation, GDP data showed that the Swedish economy contracted 0.2% qoq in Q3 and thus, we believe that officials will not rush into any action at this moment. Instead, they may prefer to wait and see how data evolve from here onwards. If all this weakness proves to be temporary, they may feel more confident to act in February.

Moving on with the BoE, expectations are for this Bank to keep interest rates unchanged at +0.75%. This will be one of the “smaller” meetings that are not accompanied by a press conference and updated economic projections, and thus any market reaction is likely to come from the accompanying statement and the meeting minutes. As we already noted, last time, the Bank noted that the nature of the UK’s departure from the EU is not known at present and that the Bank’s response will not be automatic. It could be in either direction, meaning that rates could go up even in case of a no-deal Brexit. Thus, it would be interesting to see whether officials continue to hold that view, especially following the latest developments surrounding the Brexit landscape.

UK OIS forward curve rate expectations

According to the forward curve of the UK OIS (overnight index swaps), following the recent turmoil surrounding Brexit, market participants have pushed back their expectations with regards to a BoE rate hike. Just after the November meeting, a hike was almost fully priced in for December 2019 or January 2020, but now the curve suggests that investors expect a hike near May or June 2020. Therefore, if the Bank reiterates that interest rates can move in either direction even in case of a disorderly Brexit, this could encourage market participants to bring somewhat forth their bets and the pound may strengthen. That said, we expect any gains to be limited as the main driver for the British currency is still UK politics and the Brexit sequel. Now, in case officials remove that part from the minutes, the currency could fall further as this could mean that they have changed their mind and they don’t see a hike as a good idea in case of a no-deal Brexit.

As for Thursday’s economic data, during the Asian morning, New Zealand releases its GDP figures for Q3. Expectations are for economic growth to have slowed to +0.6% qoq from +1.0% in Q2, something that is likely to leave the yoy rate unchanged at +2.8%.  A slowdown in economic growth to +0.6% qoq would be a tick below the RBNZ’s +0.7% qoq projection for the quarter and may prompt some market participants to push further back their expectations with regards to the timing of when this central bank may decide to raise rates. Such a result may also raise some rate-cut bets. After all, at the press conference following the latest RBNZ gathering, Governor Orr made it clear that he would consider a cut if GDP falls short of the Bank’s projections.

Later in the day, at the same time as the BoE decision, we get the UK retail sales for November. Expectations are for both headline and core sales to have rebounded +0.3% mom and +0.2% mom after sliding 0.5% and 0.4% respectively, but this would still drive the yoy rates lower. The case for declining yoy rates is also supported by the tumble in the yearly rate of the BRC retail sales monitor for the month. In any case, we expect this release to pass unnoticed due to the BoE decision.

Finally, on Friday, during the Asian session, Japan’s National CPIs for November are due to be released. No forecast is available for the headline rate, while the core one is anticipated to have remained unchanged at +1.0% yoy.

In the UK, we have the final GDP for Q3, which is expected to confirm its preliminary estate and show that the UK economy accelerated to +0.6% qoq from +0.4% in Q2. That said, we don’t expect this release to attract any attention. After all, we already have models and data suggesting how the economy may have performed after that quarter. The NIESR GDP tracker suggests that economic growth is set to slow to +0.4% qoq in the last quarter of 2018, while the monthly GDP for October revealed a +0.1% mom growth after the flat readings in August and September.

We get final GDP data for Q3 from the US as well, and Canada’s monthly GDP print for October. The US final GDP is expected to confirm the second estimate of 3.5% qoq SAAR, while Canada’s data is expected to reveal a rebound to +0.2% mom from -0.1% mom. Canada’s retail sales for October are also due to be released and they are expected to have accelerated somewhat in both headline and core terms. Conditional upon an upside surprise in the CPIs on Wednesday, these data releases may encourage investors to increase their bets with regards to a January hike by the BoC.

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