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by Charalambos Pissouros

Weekly Outlook: Dec 09 – Dec 13: UK General Elections, FOMC, ECB and SNB Rate Decisions

And the time has come! On Thursday, we have the UK general elections. Polls point to a Tory victory, something that could open the door for ratifying the Brexit deal agreed between UK PM Johnson and the EU. Apart from the elections, we also have three central banks deciding on interest rates: the FOMC, the ECB and the SNB. All three are anticipated to keep their respective policies unchanged and thus, the focus will be on signals and hints with regards to their future course of action.

Monday appears to be a relatively light day, with the only indicators worth mentioning being Canada’s housing starts for November and building permits for October. Housing starts are expected to have increased somewhat, while building permits are expected to have rebounded in October after sliding the month before.

On Tuesday, during the Asian morning, we have Australia’s NAB business survey for November and China’s CPI and PPI for the same month. No forecast is available for the Australian data, while both China’s CPI and PPI are expected to have increased somewhat. The CPI rate is expected to have increased to +4.2% yoy from +3.8%, while the PPI one is anticipated to have ticked up to -1.5% yoy from -1.6%.

During the European session, we get Norway’s CPIs for November. Both the headline and core rates are expected to have ticked down to +1.7% yoy and 2.1% yoy, from 1.8% and 2.2% respectively. With the Norges Bank holding the view that interest rates will most likely remain at the present level in the coming period, a small slowdown in inflation is unlikely to alter expectations around the Bank’s future course of action.

From the UK, we get the final GDP for Q3, the industrial and manufacturing production data for October, as well as the nation’s trade balance for the month. The GDP is expected to be revised lower, to -0.2% qoq from +0.3%, while the IP and MP rates are expected to have increased. The IP rate is forecast to have rebounded to +0.2% mom from -0.3%, while the MP one is anticipated to have increased to -0.1% mom from -0.4%. With regards to the trade balance, the nation’s deficit is expected to have narrowed somewhat.

In Germany, the ZEW survey for December is due to be released. The current conditions index is expected to have inched slightly higher but to have stayed in negative territory. Specifically, it is expected to have risen to -22.3 from -24.7. The economic sentiment index is anticipated to have exited the negative zone. It is forecast to rise to +0.3 from -2.1.

On Wednesday, the main event is likely to be the FOMC interest rate decision. This will be one of the bigger meetings, where apart from the statement and the press conference by Chair Powell, we also get updated economic projections, including the new “dot plot”. At the latest FOMC meeting, the Committee decided to cut interest rates by 25bps as was widely anticipated, but in the statement accompanying the decision, they changed their wording. Instead of noting that they will “act as appropriate” to sustain the economic expansion, they said that they will “monitor the implications of incoming information for the economic outlook” as they assess the appropriate path.

US Fed funds futures market vs FOMC interest rate expectations

The message we got is that the Fed is planning to stay sidelined, unless things fall out of orbit. Nonetheless, investors remained unconvinced that that policymakers are done cutting rates, and according to the Fed fund futures, even after Friday’s strong employment report, they still price in another quarter-point cut next year. They just pushed the timing back, from July to September. Thus, all the attention will be on whether policymakers will stick to their “sidelines” wording, and whether the new dot plot will still point to no further cuts next year. If this is the case, investors may eventually take their 2020-cut bets of the table something that may help the dollar strengthen.

As for Wednesday’s data, ahead of the FOMC decision, we will get the Swedish and US inflation data for November. Kicking off with Sweden’s numbers, both the CPI and CPIF rates are expected to have increased to +1.8% yoy and +1.6% yoy, from 1.6% and 1.5% respectively. We will also pay extra attention to the core CPIF metric, which ticked up to +1.7% in October from +1.6% in September. At its previous meeting, the Riksbank 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. Thus, accelerating inflation is likely to seal the deal for such an action.

With regards to the US numbers, the headline rate is forecast to have risen to +2.0% from +1.8%, while the core one is anticipated to have held steady at +2.3% yoy. Although something like that would be encouraging news for USD-traders, we don’t expect a major market reaction, as they will most probably have their gaze locked on the FOMC decision later in the day.

On Thursday, all eyes will be on the UK general election, with the results expected during the Asian morning Friday. According to opinion polls, Conservatives lead the race, with the latest one giving them a lead of 11 percentage points against the opposition Labour Party. This sparked hopes that the Tories will gain parliamentary majority, something that could open the door for ratifying the Brexit deal agreed between UK PM Boris Johnson and the EU, thereby ending more than three years of political uncertainty. That said, we repeat once again that we find it hard trusting the polls. After all, they were proven wrong in estimating the support for Brexit back in 2016.

UK general elections polls

As for the pound, we see the risks surrounding its reaction as asymmetrical. Yes, it could gain more in case of an actual Tory victory, but bearing in mind that it already rallied on such hopes, we don’t expect it to skyrocket. On the other hand, results pointing to another hung parliament could be a huge disappointment, as they would revive the risk of a disorderly exit. This could thereby push the British currency off the cliff.

Apart from the UK elections, we also have two central banks deciding on interest rates: The ECB and the SNB. Getting the ball rolling with the ECB, its latest meeting was also the last with Mario Draghi at its helm. Back then, officials decided to keep their policy and guidance unchanged, reiterating that interest rates are expected to remain at their present or lower levels until the inflation outlook robustly converges towards their aim.

ECB interest rates

Although policy action is not expected at this meeting either, it may attract special attention as this would be the first one headed by Christine Lagarde. Investors may be on the lookout for her view on monetary policy, looking for signals over how she intends to drive the monetary policy wheel. However, our view is that she will refrain from making bold comments at this meeting. We believe that she may prefer to wait for some time in order to coordinate with her colleagues and find a common line. For now, she may echo Draghi’s remarks, calling for more fiscal support by the Euro-area nations.

Passing the ball to the SNB, at its previous meeting, this Bank kept its policy untouched, reiterating that it remains willing to intervene in the FX market as necessary and that the franc remains highly valued. Since then, Switzerland has fallen into deflation and thus, it would be interesting to see whether officials will consider cutting rates. However, with rates already deep into the negative territory, cutting them further may be a difficult decision to make. Officials may show readiness to do so if needed, but they are unlikely to act at this meeting. According to Switzerland’s OIS (Overnight Index Swaps), there is only a 20% chance for a quarter-point cut to be delivered at this gathering.

Switzerland inflation

As for Thursday’s data, Eurozone’s industrial production is forecast to have slid 0.4% mom in October after rising only fractionally (+0.1% mom) in September.

Finally, on Friday, during the Asian session, we get Japan’s Tankan survey for Q4. The Large Manufacturers index is expected to have declined to 2 from 5, while the Large Non-manufacturers one is anticipated to have ticked up to 16 from 15.

Later in the day, the US retail sales for November are coming out. Both the headline and core rates are expected to have increased somewhat, to +0.4% mom from +0.3% and +0.2% respectively.



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