• Fed rate meeting: What to watch The highlight of the day will be the Fed policy meeting. After raising interest rates for the first time in almost a decade, the Fed is expected to remain on hold at this meeting, with the implied market probabilities of a rate hike currently close to 10%. The focus will be mainly on the policy statement, since no press conference is scheduled and we don’t receive any updated economic projections. In the December statement, the FOMC stressed that the path of future policy will be gradual and determined by incoming data from the labour market and signs of inflationary pressures. Since then, incoming data have shown further improvement, with December’s NFP figure surging and the CPI for the same month accelerating, albeit below expectations. If we see inflationary pressures rising, the market may need to converge with the Fed and price more rate hikes within 2016. However, despite these considerable improvements, any move today is highly unlikely. Firstly, while the NFP number rose in December, the hourly earnings growth rate remained flat. What is more, oil prices continued sliding since the last FOMC meeting. These indicate that near-term inflationary pressures could remain somewhat subdued and may present downside risks to the Fed’s inflation outlook. Additionally, the global outlook has deteriorated considerably since December, and while Fed speakers have stated that this does not substantially affect the US economy, we see a high possibility for the concerns to reappear. Since all the action will come from the statement accompanying the decision, we will look for any change from December’s tone. We don’t expect Fed officials today to lock themselves for a rate hike in March, as they will probably prefer to keep their options open and wait for the economic data to determine the actual path of the Fed funds rate. The dollar’s reaction will be highly dependent on the signalled path of future policy and on the tone of the statement.
• Besides the Fed, the RBNZ will also hold its policy meeting At their last meeting, Bank officials reduced the official cash rate by 25bps and noted that inflation was below target mainly due to the significant fall in oil prices. The Bank’s forecast was for the inflation rate to move inside the target range from early 2016, as the petrol price declines drop out of the calculation and a weaker Kiwi dollar is reflected in higher import prices. However, oil prices continued to slump while the outlook of New Zealand’s second main trading partner, China, has deteriorated significantly. More importantly, New Zealand’s inflation for Q4 fell 0.5% qoq and is very close to deflation on a yearly basis. Having just cut rates at the last meeting, we expect the Bank to remain on hold despite the soft inflation figures, partly in order to assess the impact of last year’s 100bps rate cuts. Instead of a rate cut, we expect the Bank to push back the date by which it expects to meet its inflation target, and to leave the door open for additional easing should the risks around the inflation outlook increase further.
• Overnight: Aussie jumps on inflation data The Australian dollar rose almost half a cent against the dollar overnight, following the release of better-than-expected inflation data for Q4. Australia’s headline CPI rate accelerated to +1.7% yoy from +1.6% yoy previously, while the trimmed mean CPI rate remained unchanged from the previous quarter and within the RBA’s target range of 2%-3%. The acceleration in the inflation rate, along with notable improvements in the labour market during Q4, could ease expectations for any further stimulus by the RBA at next week’s meeting. This could support AUD, at least temporarily, as the slowdown in China and falling commodity prices are likely to weigh on the currency in the medium-term.
• As for the indicators, the only noteworthy indicator we get is the US new home sales for December. Expectations are for new home sales to have increased somewhat from the previous month, but just a few hours ahead of the FOMC meeting, this indicator is unlikely to attract much attention.
• As for the speakers, we have three ECB Executive Board members on Wednesday’s agenda: Benoît Cœuré, Yves Mersch and Sabine Lautenschlaeger.