Strap in! This is the week we have all been waiting for! There will be over a dozen central banks meetings where committee members will discuss interest rate policy as inflation surges. The more interesting meetings include the FOMC, CBRT, BOE, ECB, and Banixco. Positioning and profit taking will dominate the first half of the week, while the second half will be ruled by central bank activity. In addition, the coronavirus doesn’t seem to be going anytime soon and the UK has put “Plan B” into action. Also, although the economic data will take a back seat to the central bank meetings, there will be important data this week, including the UK Claimant count, US and UK Retail Sales, a data dump from China, and Q3 GDP from New Zealand. Markets could be volatile, especially heading into the end of the week!
Wednesday is the FOMC meeting. Fed Chairman Powell recently “retired” the word transitory when testifying before the Senate and Banking Committee, thereby acknowledging that inflation is here to say, at least for now. Will the Fed increase the pace of tapering of their bond purchases when they meet? At the Fed’s last meeting, they began tapering at a pace of $15 billion bonds per month. However, with Friday’s CPI headline print for November at 6.8%, can they continue to taper at the current pace, or will they have to increase the pace to try and lower inflation. Growth and inflation forecasts will be released at this meeting.
First up on Thursday is the Central Bank of the Republic of Turkey (CBRT). We usually don’t give much attention to CBRT meetings, but with USD/TRY at all-time highs and President Erdogan insistent that raising rates is the wrong way to go about lowering inflation, this meeting will be fascinating. At the last meeting, the central bank cut bank 100bps from 16% to 15%. With Erdogan seemingly in charge, anything can happen. Note that as recent as September, rates were at 19%. On Friday, USD/TRY made all time new highs, again, at 13.96017.
Next, on Thursday, is the Bank of England (BOE). The UK’s GBP 895 billion bond buying program is set to expire at the end of December. Central Bank members voted 6-3 to leave the program unchanged at its last meeting. With only a few weeks left in the year, it is unlikely members will vote to end it now. Even if voters did end the program, it will only be a drop in the bucket as far as reducing QE. The next question is: When will the BOE begin raising rates? With new guidelines in place in the UK for the coronavirus (more to come below), the BOE should take a pass on raising rates at this meeting and wait for February 3rd.
The European Central Bank (ECB) releases its decision on interest rate policy 45 minutes after the BOE. Christine Lagarde has been pounding the table regarding “temporary” inflation (formerly known as transitory inflation). This should be one of the more intriguing meetings of the week, as the cracks may be showing for the ECB. Lagarde recently said that PEPP should end as planned at the end of March 2022, however central bank members shouldn’t make any long-term commitments regarding new programs. In addition, no less than two other ECB members spoke last week regarding inflation outlook. They referenced a possibility that inflation may not return to the ECB’s 2% target as early as initially thought. November’s preliminary inflation reading was 4.9%. With growth and inflation forecasts due at this meeting, new bond buying programs or adjustments to the ongoing asset purchase program (APP) were supposed to be discussed/implemented. How much of that will change now that ECB members have sounded a bit less dovish? Increases in coronavirus cases throughout Europe will also be a consideration.
The Bank of Mexico (Banxico) meets later in the day on Thursday. At its last meeting, Banxico increased interest rates by 25bps, just as it had the prior three meetings, to 4.75%. The only problem is that these rate increases haven’t been enough to slow the pace of inflation. It continues to increase at a rapid pace. Although central bankers have noted that they consider inflation to be transitory (obviously they haven’t retired that word yet), headline inflation rose from 6.24% in October to 7.37% in November, moving further away from the central banks 3% target! A 25bps hike is expected at the meeting on Thursday. Is it possible Banxico could raise rates by 50bps?
Rightly so, many people are talking about the coronavirus again. The surge in the UK has caused Prime Minister Boris Johnson to announce “Plan B” to try and restrict the contagion of the Omicron virus. This includes people working from home, wearing masks in public places, and using vaccine passes. However, in the UK and in other European counties, the Delta variant is still the dominant variant. In some countries, the number of new cases is reaching levels not seen since January! This spread is going to be an important factor for central banks when they meet this week. The emergence of the Omicron variant may cause central banks to give pause to an increase in tapering or an increase interest rates. Watch to see if the number of new cases grows over the next several days.
With all the central bank activity this upcoming week, it would be easy to dismiss some economic data that could otherwise sway a central bank decision one way or the other if it weren’t for inflation and the coronavirus. Employment data from the UK and Australia, a large data dump from China, Canada CPI, US and UK Retail Sales, and preliminary PMI data are all on the docket for this week! The rest of the economic data to be released is as follows:
- New Zealand: Services NZ PSI (NOV)
- Japan: Tankan Large Manufacturers Index (Q4)
- Japan: Machinery Orders (OCT)
- Australia: HIA New Home Sales (NOV)
- Australia: NAB Business Confidence (NOV)
- UK: Claimant Count Change (NOV)
- EU: Industrial Production (OCT)
- US: PPI (NOV)
- Australia: Westpac Consumer Confidence Index (DEC)
- China: House Price Index (NOV)
- China: Industrial Production (NOV)
- China: Retail Sales (NOV)
- China: Unemployment Rate (NOV)
- UK: Inflation data
- Canada: CPI (NOV)
- Canada: Housing Starts (NOV)
- US: Retail Sales (NOV)
- US: NAHB Housing Market Index (DEC)
- Canada: BoC Governor Macklem Speech
- US: Fed Interest Rate Decision
- Crude Inventories
- Global: Manufacturing and Services PMI Flash (DEC)
- New Zealand: GDP Growth Rate (Q3)
- Australia: RBA Governor Lower Speech
- Japan: Trade Balance (NOV)
- Australia: Consumer Inflation Expectations (DEC)
- Australia: Employment Change (NOV)
- Switzerland: Interest Rate Decision
- EU: Trade Balance (OCT)
- Turkey: CBRT Interest Rate Decision
- UK: BOE Interest Rate Decision
- EU: ECB Interest Rate Decision
- US: Building Permits (NOV)
- US: Housing Starts (NOV)
- US: Philly Fed Manufacturing Index (DEC)
- US: Industrial Production (NOV)
- US: Manufacturing Production (NOV)
- Mexico: Interest Rate Decision
- New Zealand: ANZ Business Confidence (DEC)
- Japan: BoJ Interest Rate Decision
- Germany: PPI (NOV)
- UK: Retail Sales (NOV)
- Germany: Ifo Business Climate (DEC)
- EU: CPI Final (NOV)
Chart of the Week: Daily Apple (AAPL)
Source: Tradingview, NASDAQ. Stone X
AAPL made new all-time highs on 4 of 5 days last week, including Friday’s high of 179.63. The stock has been moving higher since 2019, however price began to move aggressively higher in an orderly channel in Q4 September 2020, when price was near 103.10. On December 1st, the stock price gapped higher above the top trendline of the channel, only to close lower on the day and back inside the channel. However, last Monday, price gapped higher above the channel once again near 164.29, and this time, price continued higher and it hasn’t looked back. The first resistance level is the 261.8% Fibonacci extension from the high on September 8th to the low on October 4th, near 188.00. Above there is the psychological round number resistance level at 200.00. However, notice that the RSI is in overbought territory, an indication that price may be ready to pull back. First support is the high from December 1st at 170.30, then the upper trendline of the long-term channel near 165.30. Below there, there is a confluence of support near 157.26, which is the high from September 8th and an upward sloping channel dating to October 6th.
This week could define market direction for the first quarter of 2021. With many central banks due to meet this week to discuss monetary policy, an overall more hawkish tone could send stocks lower, especially into the year end period of illiquidity. However, if there is a more dovish tone, perhaps on the back of “wait and see about the coronavirus”, stocks could continue to move higher. Currencies should move relative to the decision of each central bank for its own country.
Get some rest this weekend as next week is sure to be volatile!
Have a great weekend and please remember to always wash your hands!