The run-up to the holiday period is always hectic and no more so on the economic calendar. There are five major central banks this week, including the Fed and the ECB, in addition to two more in Latin America. All eyes will be on whether the Fed increases the pace of its tapering of asset purchases, what the ECB does with its asset purchases and whether the Bank of England once more rows back on a potential rate hike. As if that is not enough, you can add in a clutch of tier one UK data and the flash PMIs for major economies. Trading volatility is likely to pick up once more.

Watch for: 

  • North America – US Retail Sales, the FOMC and flash PMIs, along with Canadian CPI
  • Europe & Asia – UK unemployment, CPI and retail sales; four major central banks: Swiss National Bank, the European Central Bank, Bank of England and Bank of Japan; and flash PMIs
  • LatAm – monetary policy updates from two central banks: Chile and Mexico

North American data: 

  • US PPI (Tuesday 14th December, 1330GMT) PPI expected to increase by +0.6% with core PPI up by +0.4% which would pull year on year levels ever higher 
  • US New York Fed Manufacturing (Wednesday 15th December, 1330GMT) is expected to decline to 25.5 (from 30.9)
  • US Retail Sales (Wednesday 15th December, 1330GMT) core sales (ex-autos) are expected to grow by +1.1% in November (+1.7% in October), with headline sales up by +1.0%
  • Canada CPI (Wednesday 15th December, 1330GMT) is expected to see core CPI up by just +0.1% MoM with the year on year core CPI slipping to 3.4% (from 3.8%)
  • FOMC monetary policy (Wednesday 15th December, 1900GMT) no changes are expected to the Fed Funds range of 0.0%/0.25% but watch for any increase in the monthly reduction in asset purchases from the current -$15bn per month
  • US Industrial Production (Thursday 16th December, 1415GMT) +0.7% MoM expected
  • US Flash PMIs (Thursday 16th December, 1445GMT) are expected to be mixed, with manufacturing increasing slightly to 58.7 (from 58.3) but services are forecast to decline to 57.5 (from 58.0)

On a week packed with tier one data, the Federal Reserve monetary policy announcement takes center stage. After Fed Chair Powell’s recent congressional testimony alluded to increasing the pace of taper of asset purchases, this will be the key decision for the FOMC. The current monthly reduction of -$15bn could be increased to -$20bn (which would end asset purchases by April) or even -$30bn (to end asset purchases by February). Increasing the taper to -$30bn would be hawkish. Traders will also be looking for any changes to the “dot plots” of interest rate projections, with a focus on how many for 2022 and also whether the terminal rate is increased from +2.50%.

Further tier-one data releases include the US Retail Sales and Industrial Production. Despite Black Friday, retail sales had a dip in November 2020. The November core sales are expected to come in at +1.1% on Wednesday, which would reflect the health of the retail sector moving towards Christmas. Industrial Production is expected to increase by +0.7% for the month which would maintain year on year production just above 5%. 

US Industrial Production/ US Industrial Production

Market Reaction: 

  • USD volatility will be elevated throughout the week, but the FOMC decision will be key. A big increase to the taper and dot plots bringing forward interest rate expectations will be USD positive.
  • CAD will be reactive to the Canadian inflation, with any positive surprise being supportive for the Loonie.

Europe & Asia: 

  • UK Unemployment and earnings growth (Tuesday 14th December, 0700GMT) unemployment expected to fall to 4.1% (from 4.3%) with Average weekly earnings expected to fall to 4.4% (from 4.9%)
  • China Industrial Production and Retail Sales (Wednesday 15th December, 0200GMT). Production is expected to improve to 5.0% YoY (from 3.5%), although Retail Sales are forecast to fall to 4.6% (from 4.9%).
  • UK CPI (Wednesday 15th December, 0700GMT) inflation is expected to increase to +4.3% for headline CPI (from 4.2%) and up to 3.6% on core CPI (from 3.4%)
  • New Zealand GDP (Wednesday 15th December, 2145GMT) Q3 growth is forecast to be +2.7% QoQ.
  • Australian Unemployment (Thursday 16th December, 0030GMT) is expected to increase to 5.5% (from 5.2%)
  • Swiss National Bank monetary policy (Thursday 16th December, 0830GMT) no change expected to the deposit rate of -0.75% 
  • Eurozone flash PMIs (Thursday 16th December, 0900GMT) are expected to show manufacturing improving slightly to 58.6 (from 58.4) with services improving to 56.3 (from 55.9)
  • UK flash PMIs (Thursday 16th December, 0930GMT) manufacturing is expected to improve slightly to 58.2 (from 58.1) with services also a shade higher to 58.6 (from 58.5)
  • Bank of England monetary policy (Thursday 16th December, 1200GMT) no change expected to the base rate at +0.10%
  • European Central Bank monetary policy (Thursday 16th December, 1245GMT) no changes are expected to interest rates, with a focus on the ending of PEPP and potentially increasing the APP.
  • Bank of Japan monetary policy (Friday 17th December, c. 0530GMT) 
  • German Ifo Business Climate (Friday 17th December, 0900GMT) 

Of the four other major central banks updating this week, the European Central Bank will take the most interest. Traders are expecting an update on how the ECB will arrange asset purchases after the PEPP emergency QE expires in March (which is around €70bn per month). The ECB will likely increase the existing APP program from €20bn per month. How the Governing Council guides on this will be key. Will it be for a limited time (to the end of 2022) or with no set end date? 

UK inflation is expected to continue to increase. This will make the job of the Bank of England even harder. A little over a month ago, traders had positioned for the Bank of England to be on course to hike interest rates at the end of 2021. However, after last month’s dovish disappointment and now Omicron uncertainty, consensus expectations have been pushed back to February at the earliest. Look for the MPC voting of not only rates but also asset purchases. This could be where the market moves.  

Major Economy Core Inflation

Market Reaction: 

  • GBP volatility elevated throughout the week due to the data, but the CPI will be key. Any upside surprise adds further hawkish pressure on the Bank of England.
  • EUR may find renewed selling pressure if the ECB continues to play a dovish hand with asset purchases.
  • AUD to find strength from any downside surprise in the unemployment level.

Latin America: 

  • Central Bank of Chile monetary policy (Tuesday 14th December, n/a) 
  • Colombia retail sales (Wednesday 15th December, n/a) 
  • Central Bank of Mexico monetary policy (Thursday 16th December, 1900GMT) 

Inflation is a big problem for central banks across Latin America. The Central Bank of Chile has a range of tolerance between 2% and 4%. Inflation is running up at 6.7%. The central bank hiked by 125 basis points at the last meeting and is expected to hike again this month. The Chilean peso outperformed Lat Am counterparts in the wake of the surprisingly large rate hike in mid-October, however, has since plunged again. Another decisive rate hike could help to support it again.

The Central Bank of Mexico is also fighting against elevated levels of inflation. The bank has been raising rates at 25 basis points in each of the past few meetings. However, inflation accelerating away and is running ahead of the 5% current interest rate. Core inflation increased to +5.7% in November (from +5.2% in October), with headline inflation up at 7.4%. Will this push the central bank into a +50bps hike? 

LatAm currencies 3 month performance

Market Reaction

  • CLP could find support from a decisive rate increase 
  • MXN will be volatile on any rate hike of more than +25 basis points