The European Central Bank will take centre stage next week as it announces its long-awaited decision to scale back its asset purchase program. Central banks in Canada, Sweden and Norway will also be holding their monetary policy meetings. On the data front, the first estimate of third quarter growth in the UK and the US will be in focus. Other major data will include Japanese and Australian inflation and Eurozone PMIs.
Japan's Abe's election gamble likely to pay off
Recent elections in Britain, Germany and New Zealand did not produce the wanted results for the ruling parties. However, Sunday's snap general election in Japan looks set to give Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP) a third consecutive term in government. The latest polls suggest the LDP-led coalition is on track for retaining its two thirds majority in parliament, which would make it easy for Abe to continue with his Abenomics policies, as well as press ahead with his proposed constitutional reforms. A win for Abe won't be positive for the yen however as it would signal a prolonged period of loose fiscal and monetary policies.
A key element of Abenomics is aggressive monetary stimulus, which the Bank of Japan has been engaged in since 2014 in an attempt to lift inflation to 2%. Inflation data on Friday is expected to show Japan's annual CPI rate increasing to 0.8% in September from 0.7% in the prior month.
Australian CPI to reach RBA's target
Australia will also see the release of inflation data next week. Third quarter CPI (due on Wednesday) is forecast to rise to 2.0% year-on-year from 1.9% in the previous quarter. This is just within the Reserve Bank of Australia's 2-3% target band. However, with wage growth still subdued, the data is unlikely to prompt the RBA to raise rates just yet. But a stronger-than-forecast reading could propel the Australian dollar higher, especially after this week's robust jobs figures.
Bank of Canada to pause after two hikes
The Bank of Canada meets on Wednesday to decide whether it should raise rates for a third time this year. After two quarter point increases in as many months, the BoC is expected to hold rates at 1.0% in October. However, the announcement statement may contain clues as to the likelihood of a rate hike at the next meeting in December. With the odds of a year-end rate rise currently running just under 50%, investors need some convincing that the BoC will move again this year, especially after this week's disappointing retail sales figures for August. The data pushed dollar/loonie above the C$1.26 level for the first time since late August.
UK growth to remain sluggish in Q3
The preliminary estimate of UK GDP growth in the third quarter is due on Wednesday but is unlikely to bring much cheer to policymakers. The Bank of England is headed for a split vote in November on whether to raise interest rates, as inflation looks set to overshoot 3% - the Bank's upper target limit. But sluggish growth is complicating the BoE's decision making as Brexit has clouded the UK's economic outlook. The British economy is forecast to have expanded by 0.3% quarter-on-quarter in the three months to September, unchanged from the prior quarter, while the annual rate is expected to moderate to 1.4%.
US GDP in focus
In contrast to the UK, the US is expected to have recorded another solid quarter of growth during the three months ending September. After growing by an impressive 3.1% annualized rate in the second quarter, the economy is forecast to have expanded by 2.6% in the third quarter, with the hurricanes in August/September likely to have caused only a minor dent. Other data to watch out of the US next week are Tuesday's flash PMI's from IHS Markit and Wednesday's durable goods orders. Both the manufacturing and services PMIs are forecast to improve further in October's flash reading, keeping with the trend of other recent survey data. Orders for durable goods however are expected to slow in September compared to August but still increase by a respectable 1.1% month-on-month.
All eyes on ECB meeting
It's going to be an important week for the ECB as the central bank treads a fine line in paring back its asset purchase program while maintaining a position of accommodative monetary policy. The ECB's current program expires in December and according to various reports, policymakers have been debating a reduction in the size of the bond purchases from €60 billion per month to somewhere between €25-€40 billion. The duration will probably be extended by six or nine months. The central bank is under pressure from both the hawks within the Governing Council as well as by its own rules which prohibit it from buying more than one third of any one country's debt, as it comes close to running out of German bunds to buy. Aside from the policy decision itself, the ECB will be very cautious in how it transmits its forward guidance on Thursday as it will not want to be seen as being too hawkish as that could drive the euro even higher in forex markets.
The ECB will not be the only central bank in town that will hold a policy meeting next week. Central banks in Norway and Sweden will also be meeting for their latest rate decisions on Thursday.
In terms of economic indicators, flash PMIs for the Eurozone will be watched. Data out on Tuesday is expected to show activity in the Eurozone's services and manufacturing sectors moderated slightly in October. More business surveys will follow on Wednesday with the release of Germany's Ifo business climate gauge.