- Central banks dominate schedule, focus on BoE and ECB; Norges Bank, SNB, Turkey TVMB and Banxico also on hand; PMIs follow Japan Trade, strong Australia labour data and weak NZ GDP; US Claims, Industrial Production and Philly/KC Fed Manufacturing surveys also on hand; ECB TLTRO-III and BCB inflation report
- BoE to err on the side of caution due to weak GDP and Omicron, and despite spike inflation
- ECB to pare PEPP QE pace, focus on staff forecasts, focus on PEPP exit guidance, very delicate balance on communication
- G7 flash PMIs: Eurozone and UK seen dipping on infection rate jumps, supply chain bottlenecks; US expected to edge even higher
EVENTS PREVIEW
It’s another bumper day for central bank meetings, following on from a slightly more hawkish than anticipated Fed, with the BoE and ECB in focus today, and there is a busy schedule of data with the focus on the run of G7 flash PMIs and French Business Confidence , above all as these will capture the initial impact of the Omicron variant on business sentiment. There are also Japan’s Trade, New Zealand Q3 GDP and Australian labour data to digest ahead of Eurozone Trade and increasingly sensitive Polish Core CPI, US weekly jobless claims, Industrial Production, Philly & KC Fed Manufacturing surveys. Outside of the ECB and BoE meetings, there are also policy meetings in Norway, Switzerland, Philippines, Indonesia, Taiwan, Turkey, Egypt and Mexico, and the ECB also publishes the results of its final TLTRO-III operation, while Switzerland’s KOF Institute updates its economic forecasts. Equity markets will also be very sensitive to any central bank ‘surprises’ given that tomorrow is quadruple witching for futures and options, though the reaction to the Fed meeting hints at an element of usual ‘pinning’ activity, once again underlining how central bank financial repression continues to smother markets’ reaction function. But with markets pricing in less Fed tightening than the not necessarily reliable guide that the Fed’s’dot plot’ suggests, and with RBA governor Lowe and BoC’s Macklem signalling a less accommodative shift overnight, markets look to be erring on the side of complacency about central bank policy in the near term. As for spiking Omicron infection rates, the critical elements are very much hospitalization and mortality rates.
G7 – December flash PMIs
– Normally December flash PMIs are so close to final readings for November in survey collection that they are swiftly dealt with. But as the already published Japanese and Australian PMI falls (above all Manufacturing) highlight, The combination of the Omicron variant emergence, and protracted and wide ranging supply chain bottlenecks are clearly dampening sentiment. Forecasts for Eurozone and UK PMIs see setbacks across the board, though in most cases still holding levels that indicate strong levels of activity overall, with a larger ‘hit’ to Services expected than Manufacturing, due to the rise in infection rates and accompanying activity restrictions. The risks would appear to be to the downside of forecasts, and the focus still very much on prices and supplier deliveries. By contrast, the US PMIs are seen picking up modestly from November’s robust levels.
U.S.A. – Nov Industrial Production
– Industrial Production and Manufacturing Output are both forecast to rise a solid 0.7% m/m, echoing survey data, though slowing from October’s post storm rebound, and with a smaller boost from the auto sector, while the Philly and KC Fed Manufacturing surveys will be watched closely for signs that supply chain pressures are easing, and follow a much stronger than anticipated NY Fed survey.
U.K. – BoE rate decision
– After larger than expected jumps in UK CPI, RPI and PPI there will be a lot of focus on the BoE, who have effectively discarded forward guidance, being fearful of painting themselves into a policy corner (or bind) and wanting more room for manoeuvre, but in the process sending an array of confusing signals that further undermines their already threadbare credibility. Markets do not anticipate a rate hike at this meeting (with Friday’s soft GDP data reinforcing that view), and the BoE ruled out an early end to its QE programme, for the rather daft reason of setting a precedent for any future QE programmes. Given that the BoE’s own research has already shown that QE has not worked as it was intended to, i.e. encouraging greater credit availability, this rationale does not stand up to any scrutiny. This is not a Monetary Policy Report meeting, so markets will have to comb through the Minutes to ascertain where the MPC sees risks (up or down) relative to its November projections. As the attached graphic shows markets are anticipating Base Rate being close to 1.0% (vs. current 0.1%) by the end of 2022, though one can assert that this is rather more a case of building in a larger rate risk premium than reflecting a consensus view on the economic outlook.
Eurozone – ECB rate decision
The question for the ECB meeting is what it signals in terms of how it will use the APP to cushion markets against the impact of the March end to its PEPP programme, though there is clearly an unwillingness to pre-commit, even if the hawkish minority continue to rail against the current open-ended QE commitment. A reduction in the pace of its PEPP QE to EUR 50 Bln / month for Q1 is expected, which would leave ca. EUR 150 Bln unutilized, which could be used flexibly in future. The challenge for Lagarde & Co is how to balance signalling a gradual withdrawal of liquidity provision, against a willingness to intervene if markets become disorderly, above all if ‘financing conditions’ were to deteriorate sharply. In that respect the updated staff forecasts, above all for inflation, will offer significant signals on how much more concerned they are about current and long-term inflation pressures, though doubtless these will still signal inflation undershooting the 2.0% CPI target at the end of the forecast period, a point made repeatedly in recent weeks, despite acknowledging near terms pressures being much, with the near term headline CPI forecast is expected to bumped up by around 1.0% to 2.7%
Norway, Turkey, Hungary & Mexico – Rate decisions
Norway’s Norges Bank is expected to hike rates by a further 25 bps to 0.50%, as previously signalled, with the focus on how recent data should prompt it to raise its longer-term rate trajectory to around 2.0%, but perhaps pushing back on the timing of the next rate hike (currently implying a further rate hike in March) due to current uncertainties. Turkey’s TCMB is expected to cut rates by a further 100 bps to 14.0%, bowing to ongoing pressure from President Erdogan, and despite the collapse in the TRY and rampant inflation. Hungary’s MNB is seen hiking its 1-week Depo rate by 20 bps to 3.50%. Finally Banco de Mexico is seen sticking with its more measured approach with a 25 bps hike to 5.25%, despite a deteriorating inflation outlook, though with an eye on significant slack in the economy, and growth decelerating.
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ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
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© 2021 ADM Investor Services International Limited.
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