Central banks’ storm!
We are getting ready for a crazy week, with critical economic data and central banks’ meetings in the UK, US, Swiss, and Eurozone. This week will tell us how this year will end and how we will start 2023. Market participants will be interested chiefly in their economic outlooks and prediction of an interest rate hike trend in the next meetings. So, the focus will be on their interest rate decision and economic perspective.
1- UK data – Across the week
Besides the Central bank’s meeting in the UK, we will also have many other essential data to be watched. Gross Domestic Product, Industrial & Manufacturing Production, and Trade balance data will be out on Monday, Labor market data on Tuesday, Inflation numbers on Wednesday, and Purchasing Manager index on Friday. Inflation is expected to increase less than a month ago, with 1.7% in November, which also brings the annual inflation down to 10.7%. The risk is that inflation expectations become entrenched, and it can affect the consumers’ behavior.
2- US inflation – Tuesday
A day before the FOMC meeting, inflation numbers will be out, and it is expected to ease to a 0.2% monthly gain, translating to a 7.2% annual pace in November. Currently, the main headline inflation driver is the service sector. Increasing prices in the services sector have offset disinflation for goods and kept the Fed cautious in its inflation outlook. While we expect core goods inflation fell 0.2% in November, core services inflation likely rose by 0.6%. That will be the last significant indicator that the FOMC members will receive before their Two-days meeting on Tuesday and Wednesday.
3- Fed Meeting & Press Conference – Wednesday
FOMC’s two days meeting will start on Tuesday, and we will have the announcement and Fed chair press conference on Wednesday. Since a 50 bps hike to 4.75 is widely expected and already priced in, the focus will be on Chair Powell’s press conference, January rate hike forecasts, and especially the dots. Dot plots will tell us what could be the maximum level rates and the possible time to start reducing interest rates. In general, despite a smaller rate hike, the inflation expectations and dot plots can hold the pressure on US stock markets and lift the USD.
4- China Retail Sales & Industrial Output – Thursday
Since China’s economic activities have been slowing in recent months, the outlook for November activities also is weak. Industrial output in November is expected to slow to 3.7% from 5.0% in October, while the consensus forecast for retail sales to decline to 3.9% annually. These expected data can hold pressure on the Chinese Yuan. Government retreat on anti-COVID restrictions may not affect November data much, but we can expect some recovery in December.
5- Bank of England Policy Decision – Thursday
The last meeting’s announcement shows that some Monetary Policy Committee members support the less hawkish decisions; therefore, we expect a lower rate hike compared to previous months, by 50 basis points to 3.50%. While some analysts believe in only one more rate hike by 25 basis points to 3.75% as a peak policy rate for the current cycle, inflation will still be the main game changer. On the other hand, earlier forecasts for a protracted economic recession can be the reason to slow down the rate hikes or even start to slightly rate cut to support the recovery. The expected decision can put the Sterling in a weaker position against its crosses.
6- European Central Bank Policy Decision – Thursday
The Central bank that will have the last monetary policy meeting among developed economies this year is the European Central Bank, which will also be held on Thursday, similar to the meetings of the BoE and SNB. In a process almost identical to other central banks, we expect that after a second-straight 75 bps increase in its Deposit Rate to 1.50%, ECB will also ease its pace of rate hike by only 50 bps to raise its Deposit Rate to 2.00%. With slightly slowing inflation to 10%, another topic that will likely be discussed is reducing the ECB’s balance sheet size or quantitative tightening. Expected policies cannot help the European stock markets but can reduce the pressures.
