A crucial week ahead for the markets as the FOMC meets to discuss the potential commencement of tapering throughout Tuesday and Wednesday. While this is expected to represent the mainstay of market attention, there are also a number of key releases due out elsewhere. In the UK, the CPI inflation rate is likely to dominate, with markets having one eye on Mark Carney’s forward guidance CPI element. In the eurozone, a relatively quiet week is largely dominated by the ZEW economic sentiment figures on Tuesday.
In Asia, a very quiet week ahead, where a number of bank holidays lead Japan into a 3 day week and China in a 4 day week. That being said, the existence of two speeches from BoJ governor Haruhiko Kuroda has the potential to move markets towards the end of the week. In Australia, a similarly quiet week looks set to revolve around the minutes from the last monetary policy meeting at the RBA, due out on Tuesday. Finally, the New Zealand GDP figure on Wednesday provides another big ticket item to keep track of.
[B]US[/B]
The week that everyone has been looking forward to, with the potential beginning of a pullback in asset purchases on Wednesday. Whilst this is certain to take precedence, the week is also punctuated by a number of key data releases in the form of the Philly Fed manufacturing index and a number of housing figures.
Ever since Ben Bernanke mentioned the potential of a drawback in asset purchases on 22 May, the markets have been deciphering every speech and data point for clues as to when this is likely to occur. The record highs seen in global indices has been driven in many ways through the creation of a market bubble through the quantitative easing measures undertaken by the Fed. Thus should we see a reduction and eventual halt to the current asset purchase program, it is likely that this will have a profound effect on the markets in the long run.
The tapering question will come to a head this week, when the FOMC reconvene for a two day meeting, culminating in the FOMC press conference from Ben Bernanke on Wednesday. Everyone will be seeking a finite answer to whether tapering is set to commence at this meeting and in many ways, this has been priced in. A decision from the Fed to avert tapering at this meeting would push the decision back to the next time the FOMC reconvene in October, yet given the fact that markets seem to all be expecting a taper, it is likely to occur on Thursday. To many, it seems that potentially the decision not to taper could be just as big a shock as the decision to reduce the asset purchases. Other key features to note from any would be taper are the amount ($10-15 billion is expected) and whether the cut will be to the treasury or MBS aspect of the current $85 billion asset purchases scheme.
Other than the FOMC meeting there are a number of interesting events this week. However, given that markets have been associating recent events with likeliness of tapering, then those occuring after the FOMC meeting on Thursday are likely to have less impact. This includes the existing home sales and Philly fed manufacturing figures.
However, the building permits figure does occur before the FOMC meeting begins and thus markets will be on the look out for any last minute clues as to whether the committee will begin tapering. The expectation is for the 0.95 million figure to remain steady this month, yet this seems unlikely given that market estimates have been incorrect on the last nine occasions. A strong figure would likely be treated as tapering inducing, whereas a poor figure would be seen to decrease the likeliness of the taper. That being said, it is unlikely that this will change the decision to taper or not. It may influence the decision as to whether the FOMC tapers treasuries or MBS, where a weak figure could point towards treasury cuts.
[B]UK[/B]
A moderately busy week for the UK economy, with the main event coming in the form of the CPI inflation figure due out on Tuesday. Other than that, the release of the MPC minutes from the last BoE meeting, along with the retail sales figures will dominate the rest of the week. The CPI measure of inflation represents the single primary target for the BoE as mandated by the chancellor of the exchequer and for that reason it is always of significant importance. However, this figure has taken on increased importance owing to the inclusion of inflation within the forward guidance provided by Mark Carney.
The expectation is for a fall from 2.8% to 2.7%, which would be highly notable given the requirement for inflation below 2.5% in 18-24 months under forward guidance. That would represent the second consecutive monthly fall in the figure. However, given the rise in fuel prices driven by the Syrian crisis last month, my bias would be for the rate to remain and disappoint the markets somewhat.
On Tuesday, the minutes and votes from the MPC are released from their meeting back on 5 September. The release is expected to have few surprises, with both the asset purchase facility and headline bank rate votes likely to come in unchanged at 9-0 against any change to the current levels.
Finally, on Thursday the retail sales figure is released, providing yet another indication of how the UK economic conditions are from a domestic consumption standpoint. The expectation is for a slowdown somewhat, falling to 0.5% from 1.1% the prior month. All signs have been very reassuring recently from the UK and there is a high likeliness that this is going to beat estimates much like the PMI data has been, especially when considering that this figure has come in above estimates on two of the last three occasions.
[B]Eurozone[/B]
A very quiet week for the eurozone, where the one main event occurs on Tuesday, with the release of both German and eurozone ZEW economic sentiment figures. The eurozone has seen a period of significant resurgence over the recent months, with GDP figures moving out of recession, along with very positive shifts into expansion for many of the key PMI figures. Along this same theme, we are expecting to see strong figures out for both these releases. The German ZEW economic sentiment figure typically takes precedence and markets will be boosted should we see a significant rise in line with expectations. Market forecasts point towards a rise from 42.0 to 45.3, which would be a six month high for the figure.
The eurozone ZEW economic sentiment figure is somewhat ahead the German number and the markets expect a proportionately larger rise, from 44.0 to 47.2. This would be a major boost for the eurozone at a notable period and seems attainable given the recent rate of growth in this figure along with a clear pickup in sentiment for the single currency.
[B]Asia & Oceania[/B]
A quiet week within Asia, where the existence of bank holidays mean that it is a three day week for China and four day week for Japan. Later in the week, we are looking towards keynote speeches from the BoJ governor Haruhiko Kuroda on Thursday and Friday. Much of the devaluation of the yen has come from the power of the word, especially from both Kuroda and Shinzo Abe. Subsequently, markets will be watching closely as these two speeches provide yet more opportunities to do much of the same.
In Australia, the minutes from the latest RBA monetary policy meeting seems to represent the only notable event of the week. The minutes, released on Tuesday, are expected to continue on the dovish tone from the RBA and given the recent strength in the Australian dollar, this could be key in seeing some of those gains wiped off.
Finally, in New Zealand, the Q2 GDP figure is set to be released on Wednesday. Expectation is for a fall from 0.3% to 0.2%, and this would be consistent with the slowdown seen in the region. The weakness seen in the New Zealand dollar has been consistent with both weakened economic prospects and a concerted effort to devalue the currency from the RBNZ. Should we see a fall in this GDP figure, it would likely drive further dovish rhetoric and actions from the RBNZ and that is likely to impact the NZD.