This is a huge data week with the ECB and Bank of England decisions on Thursday and the key US labour market report – nonfarm payrolls – on Friday. If that’s not enough we’ve just had the rate decision from the Reserve Bank of Australia (RBA), which was unchanged (some big hitters were calling for a cut, so no surprise that AUD is strong this morning!), and can expect a decision from the Norwegian Central bank on Wednesday. And in between all of this, a number Federal Reserve policy makers will be making speeches as well as testimony from Chairwoman Yellen.
Here are the key things to look for…
- No one is expecting any change in the headline interest rate decision in the UK, but there is a suspicion that more members are getting ready to vote for hikes. The voting was previously 8 to 1 in favour of keeping rates on hold, and even if economists are still forecasting the same, recent comments from members of the committee make it possible that others are more ready to move into the hawkish camp. If that were to happen the pound would surely get a boost. It’s not my base case, but this is what to look out for.
- In the United States any further slowing in labour market growth will probably put a final nail in the coffin of any December hike hopes – for my part, I still think March is more likely. Over the last few months the payrolls numbers have disappointed. Economists expect a bounce of some sort, if in fact the number is worse than the previous one, concerns will grow and should be sufficient to give the doves the ascendancy in policy discussions.
Meanwhile, taking a step back and looking at the big picture, markets have rallied impressively since the end of September. With the macro data coming out this week it will be very important to see if further headway can be made. I would venture to say that if equity markets continue to rally (and the S&P 500 is now back around the 2100 level) despite central bankers possibly sounding more hawkish this week, and despite the huge amount of equities to be sold into the market – for those who aren’t aware, there are IPO’s for postal banks in both China and Japan – if the markets continue to rally, then almost nothing will stop a decent year-end rally. From a technical perspective 2130 is a big level to watch for the S&P. Closing above that level, could mean that equity markets will rally some way further.
It’s hard to project strong conviction in front of the data minefield in front of us this week, but I continue to see the path of least resistance as dollar strength. There might be sharp reverses along the way, but once the fog is cleared, we know the ECB will continue thinking about expanding QE, we know there are hopes that the same is being considered in Japan. How can the dollar not get lifted up if its two major rivals are sold? That’s the question I have to keep asking..
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