After weeks of signalling the possibility of extra stimulus in December, the European Central Bank (ECB) has raised market expectations of a major policy change next week in a bid to lift Eurozone inflation. Meanwhile, nonfarm payrolls numbers in the United States could be the last key data to seal the deal for a December rate hike.
Before that though, Japanese industrial production figures for October should be interesting to watch on Monday. With signs of industrial output starting to recover in September and expected to increase by 1.9% in October, another monthly improvement could further dampen expectations that the Bank of Japan will increase its asset purchase program anytime soon. This would provide near term support for the yen, which has resisted further losses against the bullish dollar in recent days.
Another Asian currency that’s surprised some by moving in the opposite direction in the past week is the Australian dollar. The Reserve Bank of Australia (RBA) is due to hold its December policy meeting on Tuesday and there were previously some expectations that the RBA would lower borrowing costs for the third time this year. However, Governor Glenn Stevens pretty much ruled out another 0.25% cut during a speech on Wednesday. Investors are now likely to focus on the tone of the RBA’s statement for signs of future cuts. Third quarter GDP data out on Wednesday could also shed some light on the aussie’s prospects. GDP is expected to expand by 0.7% in the third quarter, compared to 0.2% q/q in the second quarter.
In the United States, a number of survey data is due during the course of the week, starting with the Chicago PMI on Monday (expected 55.0 vs 56.2 prior), ISM manufacturing on Tuesday (expected 50.3 vs 50.1 prior) and the ISM non-manufacturing on Thursday (expected 58.1 vs 59.1 prior). The focal point though will be the November nonfarm payrolls on Friday, while the ADP employment change figures on Wednesday should be an indication of what to expect. Nonfarm payrolls are forecast to increase by 200k in November following October’s surprise 271k jump. The unemployment rate should hold steady at 5.0%, while average earnings are estimated to slow to 0.2% m/m. Most analysts don’t expect the Fed to be too concerned if the figures fall short of estimates as it is unlikely this would impact the longer-term outlook for the US labor market but it could limit further dollar gains in the short run.
In the Eurozone, key flash inflation data will be watched closely before the ECB’s policy meeting. Germany will be the first to release November’s flash CPI on Monday. CPI is expected to increase by 0.1% to 0.4% y/y in November. For the wider euro area, CPI out on Wednesday is estimated to edge higher to 0.2% from 0% in October. The core rate is forecast to stay unchanged at 1.1% y/y. Also to watch out for the Eurozone will be the final PMI readings for November, though no change is expected from the initial estimates.
On Thursday, all eyes will be on the ECB and Mario Draghi’s press conference for the much anticipated December policy announcement where markets are expecting a 0.1% reduction in the deposit rate to -0.3% as well as some changes to its asset purchase program. This is likely to prove to be the main talking point as ECB policymakers have been pondering whether the expand the set of instruments to buy, to increase the size of the asset purchases or to extend the duration beyond September 2016. Recent reports have also suggested the ECB could introduce a two-tier deposit rate to lessen the impact of negative rates on banks with smaller holdings at the ECB. The euro has already depreciated significantly since Draghi started signalling the prospects of looser monetary policy. A bigger-than-expected stimulus could send the euro closer towards parity with the dollar by the year end, while the high expectations for Draghi to deliver on Thursday could cause a sharp reversal of the euro’s recent decline if he disappoints the markets.
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