Thu, Feb 09, 2023 @ 06:29 GMT
HomeContributorsFundamental AnalysisWeek Ahead: Central Bank Fallout, BOJ, and End of Month Data

Week Ahead: Central Bank Fallout, BOJ, and End of Month Data

After a volatile week due to a plethora of data, including CPI from the US and UK, along with central bank meetings from the FOMC, BOE, and ECB, this week things should begin to quiet down.  However, there are still a few events to be on the lookout for as we head into year-end.  The BOJ meets on Tuesday this week, the last of the major central banks to meet for the year.  No change in monetary policy is expected but watch for clues as to a possible review of how it conducts monetary policy.  In addition, US month-end data has been moved forward due to the end of year holidays. US Core PCE will be watched as Fed Chairman Powell noted a few times that this measure is closely monitored by the Fed.

Central Bank Review

FOMC

The FOMC met on Wednesday last week as it hiked rates by 50bps to bring the Fed Funds rate to 4.50%, as expected.  However, what was not so expected was the hawkishness in the Summary of Economic Projections (dot plots) which showed that Committee members have a median interest rate at 5.1% for the end of 2023.  This means that the FOMC would need to hike rates by roughly 75 more bps within the next year and sustain them there throughout the year.  Regarding the 2 most recent CPI reports, which were lower than expected and much lower than the previous readings, Powell said that it is a “welcome reduction in the monthly pace of price increase.  But it will take substantially more evidence to give confidence that inflation is on a sustained downward path”. – HAWKISH

BOE

The Bank of England met on Thursday last week and it also hiked rates by 50bps to bring the cash rate to 3.5%, as expected.  However, the vote of 6-3 shows that members are not all in agreement as to what needs to be done moving forward.  Two members voted for no change while one member voted for a hike of 75bps.  In addition, BOE Governor Bailey said that further rate increases may be required.  However, Bailey also noted that the latest MPC projections suggest CPI has reached its peak, but it is expected to remain very high in the coming months. – LESS HAWKISH

ECB

The European Central Bank also met on Thursday last week and raised its deposit facility rate by 50bps to 2%, as expected.  In addition, the statement noted that the ECB will begin QT in March 2023 at a pace of 15 billion Euros per month.  The committee also revised its inflation target higher to 8.4% in 2022 (from 8.1% previously) and to 6.3% in 2023. However, things turned more hawkish during the press conference when Lagarde said that its “obvious” that we should expect 50bps hikes for a period of time.  In addition, she said that the ECB needs to do more than the markets are pricing in.  – HAWKISH

Upcoming BOJ meeting

The Bank of Japan is set to meet on Tuesday this week, and no change is expected in its monetary policy stance. The BOJ is expected to keep rates unchanged at -0.1% while maintaining its cap on the 10-Year JGB at 0.25%. Despite inflation increasing to 3.6% YoY in October, the BOJ has said that it will take additional measures if needed to ensure an easing policy stance.  Japan will release November’s CPI on Friday.  Expectations are for an uptick to 3.7% YoY, however, the central bank will most likely continue to view this as transitory. In addition, keep an eye out for any comments about a monetary policy review.  There have been some mentions by BOJ members regarding a review of how monetary policy is conducted, they have generally been dismissed.

Earnings

Although it is the end of Q4, there are still a few earnings that will be rounding out the end of the period this week.  These include such companies as NKE, BB, MU.

Economic Data

As the end of the year is only two weeks away, some end of month releases have been moved up to this week.  There is a host of US housing data due out this week for November, in addition to the German Ifo, the Canadian CPI, and the US Durable Goods.  However, given that Powell has referenced the Core PCE as the most important piece of inflation data that the Fed watches (at both the Brookings Institute and the December FOMC press conference), the reading on Friday is sure to capture trader’s attention.  Expectations are for a November reading of 4.6% YoY reading vs a previous reading of 5% YoY.  If the print is weaker than expected, will the Fed tone down its hawkishness at the beginning of 2023?  Other important economic data due out this week is as follows:

Monday

  • New Zealand: Services NZ PSI (NOV)
  • New Zealand: Westpac Consumer Confidence (Q4)
  • Germany: Ifo Business Climate (DEC)
  • Canada: PPI (OCT)
  • US: NAHB Housing Market Index (DEC)

Tuesday

  • New Zealand: Trade Balance (NOV)
  • New Zealand: ANZ Business Confidence (DEC)
  • Australia: RBA Meeting Minutes
  • Japan: BOJ Interest Rate Decision
  • Germany: PPI (NOV)
  • Canada: Retail Sales (OCT)
  • US: Building Permits Prel (NOV)
  • US: Housing Starts (NOV)
  • EU: Consumer Confidence Flash (DEC)

Wednesday

  • New Zealand: ANZ Roy Morgan Consumer Confidence (DEC)
  • Germany: GfK Consumer Confidence (JAN)
  • Canada: CPI (NOV)
  • US: CB Consumer Confidence (DEC)
  • US: Existing Home Sales (NOV)
  • Crude Inventories

Thursday

  • UK: GDP Growth Rate Final (Q3)
  • Mexico: Mid-month Core Inflation Rate (DEC)
  • US: GDP Growth Rate Final (Q3)
  • US: Chicago Fed National Activity Index (NOV)
  • US: Kansas Fed Manufacturing Index (DEC)

Friday

  • Japan: CPI (NOV)
  • Japan: BOJ Monetary Policy Meeting Minutes
  • Australia: Housing Credit (NOV)
  • US: Building Permits Final (NOV)
  • Canada: GDP (OCT)
  • US: Personal Spending (NOV)
  • US: Personal Income (NOV)
  • US: Durable Goods (NOV)
  • Core PCE Price Index (NOV)
  • US: New Home Sales (NOV)
  • US: Michigan Consumer Sentiment Final (DEC)

Chart of the week: Daily SP 500

Source: Tradingview, Stone X

The S&P 500 Index has been moving lower in an orderly channel since making a high print of 4820.2 on January 4th.  On October 13th, the large cap index made a low for the year at 3489.  Since then, the S&P 500 rallied towards the top trendline of the channel in an ascending wedge formation.  The index made a near-term high print on December 13th at 4141.2 (right after the lower than expected CPI print) and has been moving lower since then.  There are a number of reasons as to why price stopped near this level and began moving lower:

  1. The 50% retracement from the year high in January to the year low in October sits just above
  2. Previous highs from September 13th
  3. Trendline resistance at the top of the ascending wedge
  4. Trendline resistance at the top trendline of the long-term downward sloping channel
  5. Resistance at the 200 Day Moving Average
  6. Shooting star candlestick on December 13th
  7. Price is expected to break lower from an ascending wedge as it nears the apex

The target for the breakdown from an ascending wedge is a 100% retracement of the wedge, which would be the lows of the year at 3489.  Since the Fed rate hike on Wednesday, the S&P 500 is down roughly 4.5%. If the S&P 500 does indeed continue lower, on the daily timeframe there is minor support at 3696.2 and 3587.8.  However, if sentiment changes and the index bounces next week, there is a ton of resistance above, starting with horizontal resistance at 3910.3, then the 200 Day Moving Average at 4020.3.

Keep in mind that it is the end of the year. If they haven’t done so before the risky events of last week, hedge funds, pension funds, and mutual funds will be wrapping up for the year as we head into the last 2 weeks of 2022.  Volumes should decrease as we get closer to year end, but that only means potential for more volatility if someone “needs to get something done”. If you are still trading into year end, manage your risk accordingly.

Have a great weekend!

Forex.com
Forex.com
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