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by Charalambos Pissouros

Weekly Outlook: Dec 02 – Dec 06: RBA and BoC Rate Decisions, NFPs and OPEC Meeting

This week, we have two central banks deciding on monetary policy: the RBA and the BoC. Both of them are expected to stand pat and thus, market attention is likely to fall on the accompanying statements for signals with regards to their future course of action. On Thursday, OPEC and major non-OPEC oil producers gather to decide on oil output, while on Friday, we get employment data from both the US and Canada.

Monday is a relatively light day, with the only releases worth mentioning being the final Markit manufacturing PMIs from the Eurozone, the UK, and the US, as well as the ISM manufacturing index, all for November. As it is always the case, the final Markit prints are expected to confirm their preliminary estimates, while the ISM index is forecast to have risen, but to have remained within the contractionary territory. Specifically, it is expected to have increased to 49.2 from 48.3.

On Tuesday, during the Asian morning, we have an RBA monetary policy meeting. At its previous gathering, the Bank decided to stand pat as was widely anticipated, and reiterated that they will continue to monitor developments, including in the labour market, and that they are prepared to ease monetary policy further if needed. However, officials added a part saying that the easing in monetary policy since June is supporting employment and income growth, as well as a return of inflation to the medium-term target range. In our view, this was a signal that they are done cutting rates for now, unless something unexpected happens.

Since then, data showed that the unemployment rate for October ticked up to 5.3% from 5.2%, while the net change in employment revealed that the economy lost 19.0k jobs. What’s more, the minutes of that meeting painted a more dovish picture than the statement did, revealing that the Board agreed that “a case could be made” to ease monetary policy at this gathering. This kept traders unconvinced that the Bank will remain side-lined for long, and this is evident by the ASX 30-day interbank cash rate futures implied yield curve, according to which another quarter-point cut is almost fully priced in for April next year. So, having all this in mind, we will scan this meeting’s statement to see whether policymakers still hold the view that the current policy is appropriate, or whether they are now more willing to act in the months to come.

Later in the day, we get Switzerland’s CPIs and the UK construction PMI for November. Switzerland’s yoy CPI rate is expected to have increased, but to have remained within negative territory. Specifically, it is expected to have risen to -0.1% yoy from -0.3%. The UK construction PMI is forecast to have also risen somewhat, to 44.5 from 44.2.

On Wednesday, the central bank torch will be passed to the BoC. When they last met, Canadian policymakers decided to keep their overnight rate at +1.75%, but the statement accompanying the decision had a more dovish flavor than previously, suggesting that officials have started flirting with the idea of easing. Indeed, at the conference following the decision, BoC Governor Poloz said that they considered whether the downside risks were significant enough for an insurance cut, but they decided that they were not worth the risks. He added that the situation will require monitoring. However, a couple of weeks ago, the Governor said that monetary conditions are “about right”, prompting investors to push back their bets with regards to a rate cut by the BoC. According to Canada’s OIS (Overnight Index Swaps), there is only around 5% chance for a cut at this gathering. That said, the percentage for January is notably higher, at around 30%. Thus, investors will look for hints as to whether other policymakers share Poloz’s view, or whether they still have the idea of easing on the back of their heads.

As for Wednesday’s data, during the Asian morning, Australia’s GDP for Q3 is coming out, as well as China’s Caixin services PMI for November. The qoq rate of the Australian GDP is anticipated to have held steady at +0.5%, something that would push the yoy rate up to +1.7% from 1.4%, while China’s Caixin index is expected to have gone up to 52.7 from 51.1.

We get more PMIs from the Eurozone, the UK and the US. Specifically, we get the final Markit services and composite PMIs for November, which as it is usually the case, they are forecast to confirm their initial estimates. From the US, we also get the ISM non-manufacturing index, which is anticipated to have slid to 54.5 from 54.7. The ADP employment report for the month is due to be released as well, with the forecast suggesting that the private sector has gained 140k jobs, slightly more than October’s 125k.

On Thursday, OPEC and major non-OPEC members, known as the OPEC+ group, gather to decide on oil output. The meeting will last until Friday. The group has been in agreement to reduce supply by 1.2mn barrels per day until March, and thus, investors will be on the lookout for any changes to the accord. In recent months, Saudi Arabia has not only stuck with its share of cuts, but was also producing less, to compensate for other members that have repeatedly exceeded their respective production caps. According to market chatter, instead of pushing for deeper cuts in order to balance the market, the Kingdom is likely to increase pressure to non-compliant members to come in line with their share of reductions. Russia is also unwilling to support further output cuts, but it would support extending the existing accord. Thus, it would be interesting to see whether an extension will be decided at this gathering or whether members will prefer to wait until next year, meet before March to evaluate the market outlook and decide then. Media reports suggest that an extension is more likely to be decided now and the most likely length is until June. Thus, anything beyond June is likely to come as a pleasant surprise for oil traders, while anything less (i.e. postponing the decision) may be a disappointment.

As for Thursday’s economic indicators, Australia’s retail sales are expected to have accelerated somewhat in October, to +0.3% mom from +0.2%, while the same indicator from the Eurozone is anticipated to show that sales rose +0.1% mom, the same pace as in September. Eurozone’s final GDP for Q3 is anticipated to confirm that the Euro area economy grew +0.2% qoq, as it did in Q2.

Later in the day, the US and Canadian trade data for October are coming out. The US deficit is expected to have narrowed somewhat, to USD 49.00bn from USD 52.50bn, while the Canadian deficit is forecast to have widened to CAD 1.34bn from CAD 0.98bn.

Finally, on Friday, we have the US employment report for November. Nonfarm payrolls are expected to have increased 180k, more than October’s 128k. The unemployment rate is forecast to have remained unchanged at 3.6%, while average hourly earnings are anticipated to have accelerated somewhat, to +0.3% mom from +0.2%. Barring any revisions to the prior monthly prints, this would keep the yoy rate unchanged at +3.0%.

At the latest FOMC meeting, the Committee decided to cut interest rates by 25bps as was widely anticipated, but signalled that it is planning to stay side-lined, unless things fall out of orbit. However, market participants remained unconvinced that policymakers are done cutting rates, and according to the Fed fund futures, they see another 25bps decrease in September next year. A good employment report is unlikely to vanish expectations with regards to more cuts by the Fed, but it could encourage participants to push the aforementioned timing back.

We get employment data from Canada as well. The unemployment rate is forecast to have remained unchanged at 5.5%, while the employment change is forecast to show that the economy gained 10.0k jobs after losing 1.8k in October. This would be a somewhat neutral report and we doubt that it could affect much expectations around the BoC’s future course of action. After all, such bets will be well adjusted on Wednesday after the BoC decision.

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