Week Ahead: Highlights include the FOMC, BoE, ECB, SNB, BoJ, EZ/UK Flash PMIs
- MON: OPEC MOMR.
- TUE: NBH Announcement; UK Employment (Oct/Nov); EZ Industrial Production (Oct); US PPI (Nov); IEA OMR.
- WED: FOMC Announcement and Projections; Bank of Indonesia Announcement; Chinese Retail Sales (Nov) and Industrial Production (Nov); UK Inflation (Nov); US Retail Sales (Nov); Canadian CPI (Nov); New Zealand GDP (Q3).
- THU: ECB, BoE, SNB, Norges, CBRT, Banxico Announcements; EZ, UK and US Markit Flash PMIs (Dec); Australian Labour Force Report (Nov).
- FRI: BoJ Announcement; CBR Announcement; German Ifo Survey (Dec); EZ CPI Final (Nov).
NOTE: Previews are listed in day-order
UK EMPLOYMENT (TUE): The last BoE meeting, which saw a split decision on increasing rates, placed much of the justification to hold the Bank Rate on MPC members awaiting further insight into the labour market post-furlough. Since then, employment metrics have been encouraging and the November insight from PMIs indicate that the “…buoyant jobs growth signalled should bring some reassuring comfort.” To rate setters, however, such data may be overshadowed by COVID-19’s resurgence via the Omicron variant, with MPC member Mann writing that it was premature to talk about the timing of hikes, while the known hawk Saunders took a more neutral view on lifting rates, writing that a key consideration for the meeting will be the possible economic impact of the variant and the “potential costs and benefits of waiting to see more data on this before – if necessary – adjusting policy.” As a reminder, Saunders and Ramsden voted for a rate hike in November. Finally, currently, money markets price just over 40% probability of a December rate hike, which is substantially lower vs 90% chances seen in recent weeks; additionally, the likes of JPM and Goldman Sachs have pushed back their forecast for a 15bp hike to February given Omicron.
NBH PREVIEW (TUE): The Hungarian Central Bank is seen upping its Base Rate by at least 30bp to 2.40% – the forecast range is between +30-100bps. Ten of 15 economists surveyed are pencilling in +30bps. The central bank has, however, shifted the emphasis off the benchmark rate to its one-week deposit rate – the tool that the central bank uses to tackle short-term financial market volatility – which it has recently lifted on several occasions. The central bank’s new economic forecasts will also likely show inflation above its target range for the second year running.
UK INFLATION (WED): Headline inflation is expected to have increased to 4.7% Y/Y in November from 4.2% previously, with the monthly rate expected to have cooled to +0.3% M/M from 1.1%. The core rates are also expected to have slowed to 0.4% M/M (prev. 0.7%) and 3.1% Y/Y (prev. 3.4%). Desks remind us that November 2020 saw the second national lockdown in the UK – which lasted until early December – and thus this month’s release will likely be subject to base effects. Using the most recent Markit PMIs as a proxy, the services release for November suggested that “another round of rapid cost inflation, driven by higher fuel prices, wages and utility bills,” was on the cards, with “prices charged by service providers also increased at the fastest rate since the survey began in July 1996… November data pointed to surging input costs for suppliers.” In terms of recent commentary, a couple of MPC members this month expressed some concern over prices: hawk Saunders suggested that “with inflation well above target, this reinforces risks of a further rise in long-term inflation expectations. This could require a more abrupt and painful policy tightening later”, whilst Broadbent said that “the aggregate rate of inflation is likely to rise further over the next few months and the chances are that it will comfortably exceed 5% when the Ofgem cap on retail energy prices is next adjusted, in April”. In its November Monetary Policy Report, the BoE said “CPI inflation is expected to rise to 4.5% in November and remain around that level through the winter, accounted for by further increases in core goods and food price inflation. Wholesale gas prices have risen sharply since August. CPI inflation is now expected to peak at around 5% in April 2022, materially higher than expected in the August Report”. Despite these inflation metrics on Wednesday, BoE members see inflation upside as transitory, thus the UK employment data will likely carry more weight heading into the Thursday MPC meeting.
FOMC PREVIEW (WED): The FOMC is expected to leave the FFR target unchanged at 0-0.25%; the focus will be on the pace of its asset purchase tapering. Fed officials have recently argued that there is a case to accelerate the pace from the current USD 15bln/month (10bln of Treasury’s, 5bln of MBS), which on the current trajectory, would see purchases conclude in June 2022. However, hot inflation prints, which has seen the Fed retire the ‘transitory’ description, as well as signs of a strong jobs market recovery, bolsters the case for an acceleration. Some expect the Fed will double the pace of the taper to USD 30bln/month, which would then see asset purchases conclude in March. Meanwhile, the statement will be eyed for any commentary on Omicron, which the central bank will likely acknowledge is a risk, but not something that would at this stage compel it to adjust its policy course. Meanwhile, the term "transitory" will presumably be removed given Powell said it is now time to retire the description. SGH Macro believes that there will be a noticeable change in the expressed reaction function and narrative, arguing that the Fed will shift from “supporting the labour market requires patient policy” to “supporting the labour market requires maintaining price stability.” SGH said this leaves balances of risks on the side of inflationary outcomes, with the Fed more likely to react to higher-than-expected pressures, as it has shown already leading into the confab. "This is what creates the risk of a March rate hike, assuming the data holds on the current trends of strong demand growth, rapidly falling unemployment, and unacceptably high inflation," SGH concludes. The Fed will also publish update its Summary of Economic Projections, with much focus on the rate hike forecasts (which currently see one rate hike in 2022, with a 50/50 chance of another – lagging behind the market’s current view of two hikes with risks of a third); inflation forecasts are likely to be raised in the short term, but are still expected to show a decline into 2023 – the Fed chair recently told lawmakers that he expects price pressures to ease significantly next year. Labour market forecasts should be revised positively, especially after the encouraging drop in unemployment in November (4.2% from 4.6%), alongside more encouraging slack measures. Powell in November said it was possible the US could achieve maximum employment by the middle of 2022. With tapering now expected to be concluded sooner than previously though, officials have argued this will give the Committee more optionality on rate hikes. SGH said that "a natural interpretation of this would be rate hikes in June and December," though its economists acknowledge risks of a hike as soon as March, although this is not likely to be reflected in the dot plot. "Accelerating the taper only increases the optionally to hike before June, it doesn’t guarantee such a hike." A recent Reuters survey revealed economists expect the Fed to raise rates by 25bps in Q3 of 2022, but 30 of 36 surveyed felt there was a risk that the first-rate hike comes earlier than expected.
CHINESE RETAIL SALES AND INDUSTRIAL PRODUCTION (WED): November retail sales are forecast to be unchanged 4.9% Y/Y, while industrial production is seen at 3.8% Y/Y (prev. 3.5%). Desks have downplayed the significance of the retail sales data, and have suggested that underlying strength is to become apparent next year given the recent COVID-related measures implemented across parts of China. Industrial production meanwhile could see some headwinds from the power outages that occurred in November.
US RETAIL SALES (WED): The street looks for US retail sales to rise 1.0% M/M in November (prev. +1.7%). If the consensus is realised, it would be the fourth straight month of rises. Analysts note that auto sales were 13.1mln SAAR in November, little changed on a M/M basis, and accordingly, may drag on the headline. The ex-autos measure is seen rising 1.1% M/M (prev. 1.7%). Higher gas prices will likely add to the headline and will not reflect the recent measures the administration has taken to lower energy costs. Credit Suisse' analysts argue that high frequency card spending data suggest goods consumption rose solidly in November. "Restaurant spending may be weak as we enter winter with COVID infections picking back up," it writes, but "goods spending has remained resilient even as fiscal support has waned, and vaccines have reduced social distancing and increased services spending." Regarding the health of the consumer, CS notes that household balance sheets have undergone significant repairs this year and an intense labour market recovery is leading to strong wage growth; "real goods consumption currently sits far above its pre-COVID trend and some eventual normalisation is likely, but for now strength can persist."
CANADIAN CPI (WED): As yet, there is no analyst consensus for Canada's November CPI metrics, but Canadian bank RBC expects the headline rate of inflation will ease to 4.5% Y/Y from the two decade high 4.7% in October. RBC explains that gasoline prices have eased from October, but are still up by more than 40% Y/Y, and that accounts for more than a quarter of the annual CPI growth rate. The bank sees food price growth remaining steady in the month, but notes that the declines seen recently in wholesale meat prices may point to an easing ahead. Meanwhile, it sees ex-food and energy price growth holding at a little above 3.0% Y/Y, which it says is underpinned by increasing shelter costs and broadening price growth as household demand continues to strengthen.
NEW ZEALAND GDP (WED): Q3 GDP is expected to contract, with the consensus looking for -4.5% Q/Q (vs +2.8% in Q2) and -1.6% Y/Y (vs 17.4% in Q2). The data will reflect the impacts of the lockdowns implemented in August following an outbreak of the Delta variant. “Sectors that were most heavily impacted by restrictions will unsurprisingly see the largest declines,” Westpac said, “this would also include sectors where a large share of activity occurs in Auckland which spent more time on Alert Level 4; on the other hand, those that could continue operating under Covid requirements are expected to record gains.” It’s worth noting that this data is backwards-looking and the RBNZ has been on a tightening path in recent meetings, with timelier monthly data likely to garner more attention.
ECB PREVIEW (THU): The ECB is expected to stand pat on rates. Policymakers are at pains to communicate that 2022 is unlikely to see any move on rates, despite markets pricing in a 10bps hike to the deposit rate by December 2022. Instead, focus for the upcoming meeting will be on the Bank's bond-buying operations, with PEPP set to draw to a close in March. For Q1 2022, purchases are likely to be conducted at a moderately lower pace under PEPP than seen in Q4 2021, officials have recently said. Additionally, a recent ‘sources’ piece suggested that policymakers were considering PEPP reinvestment tweaks to address any market stress, and may expand the reinvestment period in its emergency bond programme. However, the greater unknown for the market is how the ECB intends to continue buying bonds after the PEPP concludes. The December confab, up until recently, had been earmarked as the meeting at which a decision around "beefing up" its traditional APP would be taken, in a move that would ensure favourable financing conditions can be maintained after PEPP. However, the emergence of the Omicron COVID variant and mobility restrictions in the Eurozone has complicated this. Another sources piece has noted that policymakers were increasingly concerned that the outlook was too murky for a comprehensive policy decision in December, and therefore the decision on recalibrating APP may need to wait until February. However, more further sources reports said that a decision on APP could be unveiled at the upcoming meeting in an attempt to form a compromise between the hawkish and dovish elements of the Governing Council; the compromise would involve enhancing the APP (currently EUR 20bln/month), but imposing limits on the size and any time commitments. This could be achieved by either: a) announcing a purchase envelope that would run until the end of 2022 and not have to be spent in full, or b) increase purchases for a short period and continue them thereafter at a slower pace (subject to review). In either outcome, Reuters notes that bond purchases as of April would be conducted at a significantly slower pace than they are currently with headline CPI currently running at 4.9% Y/Y. It is worth noting that although such a proposal will likely be raised at the upcoming meeting, the risks posed by Omicron could yet see the decision pushed back until February, and therefore, the upcoming policy announcement remains subject to a high amount of uncertainty. A move to delay the decision on APP until February might prompt a more hawkish eventual outcome; Dutch bank ING argues that "the resurgence of the virus could prolong supply chain disruptions and therefore add to growing medium-term inflation concerns," a view also expressed by an unnamed policymaker in another sources article. Regardless of the outcome at the coming meeting, the main takeaway for investors will be that 2022 is set to see policymakers slow down the current elevated level of bond purchases (but still remain supportive) whilst refraining from hiking rates, the extent of the former is the key focus for markets.
BOE PREVIEW (THU): Heading into the November meeting, markets had fully priced in a 15bps interest rate hike by the MPC, whilst surveyed analysts were less convinced and, on balance, expected no change to the Bank rate. In the end, analysts were proven to be correct with the MPC refraining from moving on rates (Saunders and Ramsden were the dissenters) on the basis that "there was value in waiting for additional information on near-term developments in the labour market." Given the market backlash over the MPC failing to deliver on a fully priced 15bps hike, and a subsequent encouraging labour market report, market participants were of the view that policymakers would pull the trigger at the December meeting; however, the emergence of Omicron and imposition of ‘Plan B’ by the government has presented headwinds to the outlook. External member Saunders recently remarked that there are "some advantages" in waiting for more data on Omicron. Additionally, MPC’s Mann also cautioned that it was premature to talk about the timing of rate hikes. From an inflation standpoint, UBS argues that Omicron presents two opposing forces: on one hand it will act as a headwind for energy prices, whilst on the other it will further restrict mobility and potentially prolong supply chain disruptions. As such, given the uncertainty presented by the variant there is clearly time value in waiting. As it stands, the median expectation for the upcoming decision (poll conducted Dec 6-8th) is for an unchanged rate of 0.1%, according to Reuters. It is worth highlighting the breakdown in views however, with 25 of 46 surveyed expecting an unchanged decision, while 21 of 46 surveyed expect a 15bps hike; given the split in views, the word "consensus" should be used with caution. From a pricing perspective, markets assign a circa 40% chance of a 15bps hike next week. JPMorgan, which has pushed back its call for a 15bps hike to February, also expects follow-up +25bps hikes at the May and November meetings to bring the rate to 0.75% by the end of 2022; JPM notes that a delay would still be consistent with the committee’s recent November guidance of raising rates in the 'coming months'. On the balance sheet, consensus looks for the APF to be held at GBP 895bln (GBP 875bln Gilts, GBP 20bln corporates).
SNB PREVIEW (THU): The Swiss National Bank is expected to keep rates unchanged, and as usual, focus is primarily on language around the Swiss Franc’s valuation. At its September meeting, the SNB continued to view the CHF as ‘highly valued’; to recap, the only notable tweak was in the Franc’s accompanying language which changed to “willing to intervene in the foreign exchange market as necessary in order to counter upwards pressure” from the previous “… while taking the overall currency situation into consideration”. While this alteration seemingly places further onus on intervention being used to counter CHF upside, sight deposit activity since then has increased, but not at a pace/magnitude sufficient to stem substantial currency appreciation from the September decision’s EUR/CHF opening level of 1.0822. However, domestic sight deposits have risen by just shy of CHF 15bln since September, almost three times the increase seen between the June and September gatherings – as such, while intervention has not stopped the CHF’s appreciation, and the currency has been allowed to move through previous ‘lines in the sand’, the SNB clearly remains active in the FX space. Given the Franc’s movements, it will be interesting to see firstly whether the currency's valuation is raised, which, if precedent holds, would be to ‘even more highly valued’ or perhaps to ‘significantly overvalued’ from the current ‘highly valued’ view. Secondly, as to whether the accompanying language around intervention is altered, note Vice Chairman Zurbrugg is to retire at the end of July 2022 – it remains to be seen who his replacement will be. Elsewhere, the December gathering brings fresh forecasts and a press conference.
NORGES PREVIEW (THU): In November, the Norges Bank left its key policy rate at 0.25%, as expected, and reiterated that the rate will most likely be increased again in December. In the upcoming meeting, focus was on whether the notable NOK upside would derail the Norges Bank’s policy path. The Bank acknowledges that such upside could curb price increases, but it did not at the time appear to have altered its tightening intentions. November’s CPI surpassed market expectations, and thus serves as justification for continuing with a December hike – albeit, this print may well prove to be the ‘peak’ given expectations for a pullback next year. Inflation aside, data points since November have been constructive, with PMIs surpassing expectations and the unemployment rate continuing to decline. However, it remains to be seen what impact Omicron will have – there have been no pertinent remarks from rate setters on the subject. For what it is worth, the regional network report would generally be a key read going into such an announcement, however, the survey period did not encapsulate the recent Omicron developments, and as such, is inherently stale. Overall, while November’s guidance and economic indicators point towards a second 2021 hike being delivered, it remains possible that the Norges Bank could determine that Omicron was a fresh headwind that justifies deviating from its path. Finally, as has been the case recently, we are still awaiting an update around Governor Olsen’s replacement.
CBRT PREVIEW (THU): The Turkish Central Bank is expected to ease policy to an extent, following the hat-tip given in the November statement, where it said “the Committee will consider to complete the use of the limited room implied by these factors in December.” The meeting also comes against the backdrop of continuing deterioration in the Lira currency, pressured amid dwindling investor confidence as President Erdogan maintains his unorthodox policy views that higher rates lead to high inflation. The CBRT has also been defending the 14.00 level in USD/TRY with interventions after pledging to react to “unhealthy” price action. Recent inflation data has also printed above forecast, but this is unlikely to guide the central bank down the traditional tightening route at this meeting. Analysts at Barclays expect the CBRT to lower its rates by 200bps at the December meeting, followed by another 100bps reduction in January, whilst recent commentary suggests the market expects a 50-100bps cut next week.
BANXICO PREVIEW (THU): Heading into next week's Banxico meeting, Mexican inflation rose to a two decade high at 7.4% Y/Y, which will be a concern for the central bank. However, Capital Economics explains that this was partly driven by unfavourable base effects which will soon unwind, and it still believes that the pace of policy tightening from the Banxico will remain gradual. "Increasing concerns about the inflation outlook may lead to a more hawkish shift on Banxico’s Board," CapEco writes, "but with inflation near a peak, and the economic recovery faltering, we still expect another 25bp rate hike, to 5.25%, at the central bank’s meeting next week.
EZ MARKIT FLASH PMI (THU): December Flash PMIs are expected to show a slight waning in sentiment, according to current forecasts. Manufacturing is seen at 57.6 (prev. 58.4), services is expected at 54.0 (prev. 55.9), and the Composite is seen easing to 53.8 (prev. 55.4). The surveys will fully encapsulate the numerous COVID-related tightening measures implemented across the EZ over November/early December. RBC expects the services metric to ease to 54.0, and see the manufacturing little-changed from last month’s 58.5: “the manufacturing PMI however, continues to overstate the extent of activity in the sector and we would not attach too much significance to it,” it says.
UK MARKIT FLASH PMI (THU): Focus for the PMIs will be on what, if any, impact the Omicron has had on sentiment, as the November responses were primarily before the variant was known, and certainly before it spread and nations began implementing restrictions. For the UK there has thus far been no formal lockdown imposed; however, mask wearing, vaccine passports and work from home advice has been announced as part of a snap move by the Government to a so-called ‘Plan B’. As a potential guide into the release, Springboard’s UK shopper survey appears to show the Omicron variant having an impact – explicitly, a 2% drop in London’s back-to-the-office benchmark and a 3.8% reduction in ex-London regional footfall. On the variant, it is still too early for authorities to give a definitive assessment, but initial indications appear to be somewhat encouraging as while transmissibility is high the variant has not, to date, been associated with an increase in mortality. Reminder, the November flash reading saw the Composite and Services readings drop from the prior, but printing above expectations, while Manufacturing beat on both accounts, driven by “the strongest rises in output, new orders and employment since August.”
AUSTRALIAN LABOUR FORCE (THU): November is expected to have seen the addition of 200k jobs (vs -46.3k in October), with the employment rate seen ticking lower to 5.0% from 5.2%, while the participation rate is forecast to rise to 65.5% from 64.7%. Last month’s report was impacted by weakness in full-time employment, with part-time employment showing more resilience. Aussie bank Westpac expects the pace of workers returning to the labour force to outpace gains in November: “our forecast for a 242k lift in the labour force that will see participation rise to 65.8% and unemployment rise to 5.3%. Before the latest lockdowns the participation rate peaked at 66.2% in June 2021.” From a monetary policy perspective, this month’s employment data is unlikely to sway the RBA, as the central bank’s next meeting is scheduled for February 1st. By then, more timely employment and inflation metrics will likely be available.
BOJ PREVIEW (FRI): The BoJ is expected to keep its key rate unchanged at -0.10%, and is expected to maintain its QQE with YCC to flexibly target 10yr yields at 0%, although market participants will be eyeing any clues on whether the central bank will extend its pandemic relief measures which are set to expire in March. The recent emergence of Omicron has shifted some views regarding the central bank’s coronavirus response; a sources report recently suggested that the BoJ sees the new variant as a potential reason to sustain pandemic support; this is in contrast to pre-Omicron reports that said the BoJ was mulling tweaking its pandemic relief programme and considering reducing COVID-19 related measures as soon as April next year. Officials have acknowledged concerns, but haven’t suggested an urgency for any immediate action. Deputy Governor Amamiya noted the outlook was highly uncertain due to the emergence of Omicron, but added that its baseline view was that the Japanese economy would show a clearer recovery in H1 2022. Amamiya also reiterated the central bank would continue with powerful easing to achieve its price goal, and stressed that it was ready to ease further as needed; Amamiya added that there was no need for the BoJ to modify its massive monetary easing policy, and it would decide in either December or January whether to extend pandemic relief programmes. Other officials, including Governor Kuroda, also said that they will decide the fate of the scheme by scrutinising pandemic developments and the corporate funding situation, while Board Member Suzuki wants to assess the Tankan data before deciding on pandemic relief programmes, but caveated that the programmes were introduced as an emergency measure and that they would need to terminate them sometime in the future.
CBR PREVIEW (FRI): Heading into the CBR meeting, Russian inflation picked up by 0.3ppts to a rate of +8.4% Y/Y in November, the quickest rate since 2016, which leaves risks that the central bank will continue to raise its policy rate from the current 7.5%. At its previous confab, Governor Nabiullina raised the prospect of a 100bps move at this meeting. ING noted that the CPI trend is testing the upper border of the Bank of Russia's base case (8.0-8.5% for 2021, and 4.0-4.5% for 2022). "The year-end 2021 forecast of 7.4-7.9% should not be over-emphasised, given its extremely short-term nature, while the longer-term commitment to bring CPI down to 4.0-4.5% by the end of 2022 is more important," ING writes, but "given the elevated inflationary expectations of local households and corporates, the tight labour market and high appetite for borrowing vs savings, persisting global uncertainties, and the local economic policy priorities reiterated by the President, we believe the CBR's decision should gravitate towards the upper border of the 0-100bps key rate hike range implied by its previous communication."