The Federal Reserve is expected to make its long-awaited announcement on its balance sheet reduction plan next week, though investors will probably be more interested in the FOMC’s latest dot plot chart. The Bank of Japan also holds a monetary policy meeting but it will likely be a less exciting event than the Fed’s. On the data front, Eurozone flash PMIs, UK retail sales, Canadian inflation and New Zealand GDP will be the highlights.
Eurozone data unlikely to shift euro out of consolidative phase
As the European Central Bank works on the details of its stimulus withdrawal plan, the euro rally has taken a pause. Data releases next week should provide some support for the euro but are not seen to drive the single currency to fresh highs, especially amid a stronger dollar and pound. First on the calendar is Monday’s final inflation readings for the block. The annual rate of change in Eurozone CPI is expected to be confirmed at 1.5% in August, but core CPI is forecast to be revised down to 1.2% from the flash estimate of 1.2%. Germany’s ZEW business survey will be watched on Tuesday. The ZEW economic sentiment and current conditions indices are both expected to improve in September. Eurozone producer prices for August will follow on Wednesday, but all eyes will be on Friday’s flash PMI readings. Economic activity in the euro area is expected to remain steady with the IHS Markit composite PMI falling marginally to 55.6 in September’s flash reading. The services PMI is forecast to stay unchanged at 54.7, while the manufacturing PMI is expected to decline by 0.2 to 57.2.
Bank of Japan meeting to be a non-event?
The Bank of Japan’s policy meetings are known just as much for being non-events as for surprising markets with unconventional stimulus measures. The meeting on September 20-21 is looking like it will be the former as the Bank is not likely to make any changes to its forecasts before the October meeting when it will publish its quarterly outlook report. It’s possible that next month the Bank could once again delay the timing of when its expects to hit its 2% inflation target. This would reinforce expectations that the BoJ will be the last of the major central banks to start tightening monetary policy. Before the BoJ meeting, trade data will come in focus on Tuesday. Exports from Japan are forecast to rise by 14.7% year-on-year in August as a weaker yen and improving global demand continue to boost Japanese manufacturing output. Another positive figure in August would make it the ninth consecutive month of annual gains in exports.
New Zealand GDP eyed ahead of elections
GDP figures out of New Zealand next week may provide a welcome distraction away from the September 23 election campaign that is proving to be a much tighter race than anyone anticipated. An unexpected strong showing for the Labour party has made the New Zealand dollar highly volatile in recent weeks as the prospect of the ruling National party losing power has unnerved investors. Solid GDP data on Wednesday could remind markets that the country’s economic fundamentals remain strong and possibly provide some indication to the timing of a rate hike by the Reserve Bank of New Zealand. After growing at a relatively modest pace in the previous two quarters, New Zealand’s economy is forecast to pick up speed in the June quarter, with growth accelerating to close to 1% over the quarter.
Canadian inflation and retail sales data to be watched after surprise rate hike
The Bank of Canada had to defend itself this week after receiving criticism for not clearly communicating that a rate hike at its September 6 meeting was on the cards. Market participants will therefore be watching next week’s inflation and retail sales numbers more carefully for clues about a possible third rate hike in as many months. Canadian CPI, due on Friday, is forecast to rise from 1.2% to 1.5% y/y in August, suggesting that inflation is moving back towards the BoC’s target as expected. Retail sales, also out the same day, are forecast to grow by 0.2% month-on-month. An upside surprise could add fresh impetus to the loonie’s rally, which is currently trading near two-year highs against the greenback.
UK retail sales growth to moderate further
An IT problem at the Office for National Statistics caused a delay to the retail sales data, which are normally published in the same week as the inflation and employment reports. The delayed release may act in cooling the pound’s 3% surge this week as retail sales are forecast to ease in August. Annual growth in retail sales is expected to moderate for the second month in a row to just 1.1% in August, while the month-on-month rate is forecast at 0.2%. A worse-than-anticipated reading may feed doubt into the expectations that the Bank of England will begin raising rates in the coming months.
Fed to start balance sheet normalization
The Fed will move into the limelight next week as it holds its two-day monetary policy meeting on September 19-20. However, second-tier data releases should also attract some attention, starting with a batch of August housing data on Tuesday. Building permits and housing starts are both released on Tuesday, followed by existing home sales on Wednesday. The Philly Fed’s diffusion index of manufacturing activity for September is out on Thursday, and the IHS Markit flash manufacturing and services PMIs (also for September) will round up the week on Friday.
An announcement on reducing its $4.5 trillion balance sheet is widely expected by the Fed on Wednesday given that such a decision has been well telegraphed by FOMC members over the past few months. Market reaction, in particular for US treasury yields, will likely be muted as the Fed has said it will proceed with scaling back its reinvestments in maturing treasuries and mortgage-backed securities very gradually.
The bigger surprise at Wednesday’s announcement and press conference by Chair Janet Yellen might come from the FOMC’s revised economic projections. After this week’s stronger-than-expected inflation data, a December rate hike is back in play. Therefore, any indication that Yellen is becoming more confident that inflation is heading back up again could fuel the dollar’s gains from this week. More importantly, the Fed’s latest dot plot chart should reveal whether or not FOMC members still expect to see a third rate hike this year and if there’s been any change to their rate path prediction for 2018.
