After a shortened trading week in the US and thin trading volumes in Europe due to Thanksgiving celebrations, markets will shift their focus into key events with Thursday’s ECB meeting and Friday’s non-farm payrolls release on the top of the investors watch list.
ECB rate decision: An early Christmas gift to markets?
Mario Dragi had set high expectations over the past couple of weeks promising markets they (ECB) "will do what they must" to raise inflation as quickly as possible, a similar phrase substituting the more than three years old “whatever it takes to save the Euro”. Although the central bank used most of its tools to boost economic and inflation growth, there is still further room to maneuver around the terms.
Euro traders have already priced in some of the ECB’s expected actions and requires policy makers to surprise markets for further depreciation in the single currency. What does it take to exceed expectations in order of importance?
- Cutting deposit rates: Economist are expecting a further cut in deposit rate to -0.3% from -0.2% (An interest rate charged for banks parking money at the ECB). A cut to -0.4% to -0.5% would be enough to drag the Euro aggressively lower against its major peers.
- Expansion of asset buying program from current €60 billion towards €75 billion or above is on the table. The question remains whether there is enough assets for ECB to buy, as the central bank is reportedly thinking about buying municipal debt as part of its purchase program, or even a more aggressive plan towards buying corporate debt.
- Extending the asset purchase program. A similar strategy to what the Federal Reserve had done in the past is ideal for short Euro traders, meaning that the ECB will not specify a date at which the program will end and simply keep it open ended until meeting particular economic conditions.
A combination of alerting the three policies together would provide an extension to European equity rally and currency traders will be adding more pressures on the EURUSD targeting parity before year-end.
Other central banks to watch, RBA and the BoC are both expected to monetary policy unchanged with their recent economic indicators matching better than their previous forecasts.
The Godfather of economic indicators to clear remaining doubts
After last week’s encouraging economic releases from the US, option traders priced a 77.5% rate hike in December. US GDP expanded at 2.1% from previous reading of 1.5%, durable goods increased 3% in October following two consecutive months of decrease, and investors still need to tick the NFP box for rate hike confirmation. The release expected to show jobs increased by 200,000 in November down from 271,000 in October, and even if it disappoints the Fed is expected to trigger. Markets have shifted their focus from the first rate hike to the cycle at which the Fed is intended to proceed, meanwhile headwinds for strong dollar could force the Fed to publish a less hawkish statement on the 16th of Dec. On Thursday, a day before the release, traders will look at Fed Chair Janet Yellen’s testimony on the economic outlook before the congressional Joint Economic Committee; her speech might provide more insight for the next Fed meeting.
OPEC meeting in Vienna Dec 4
With oil prices continuing to plunge and many OPEC members suffering from the resultant on their revenues. Some members are requesting to set a floor on prices and re-establish a system of quotas per each country, however Kingdom of Saudi Arabia was looking at a different strategy, keeping higher market share and kicking out high cost producers out of the market. This strategy seems to have worked so far but not to the extent they hoped for, as supply glut is expected to remain on the foreseeable future. Moreover, Iran, which will increase its production by about half a million barrel a day in a few months will only add to the glut. If no action is taken by OPEC members to stabilize the market, expect prices to break below lowest levels tested for the year.
Economic reports (GMT)
Monday 30 November
1pm - German inflation (November, preliminary): expected to hold at 0.3% YoY. Market to watch: EUR crosses
2.45pm - US Chicago PMI (November): expected to drop to 55 from 56.2. Markets to watch: US indices, USD crosses
3pm - US pending home sales (October): Forecast to rise 1% MoM. Markets to watch: US indices, USD crosses
Tuesday 1 December
1am - China manufacturing and non-manufacturing PMI (November): the official manufacturing survey is forecast to stay at 49.8 MoM, while the non-manufacturing reading holds at 53.1. Markets to watch: Asian indices, AUD/USD, FTSE mining stocks, copper
1.45am - China Caixin manufacturing PMI (November): this is the private sector reading, which can be more reliable, and is expected to rise to 48.5 from 48.3. Markets to watch: Asian indices, AUD/USD, FTSE mining stocks, copper
3.30am - RBA rate decision: interest rates in Australia are not expected to change from the current 2%. Market to watch: AUD crosses
8.55am - German unemployment (October): not expected to change from current 4.5%. Market to watch: EUR crosses
9.30am - UK manufacturing PMI (November): activity expected to slow, with the index forecast to move down to 54 from 55.5. Market to watch: GBP crosses
10am - eurozone unemployment (October): this is expected to hold at 10.8% YoY. Market to watch: EUR crosses
1.30pm - Canadian GDP (Q3): forecast to increase to 0.1% from -0.1% QoQ, and YoY to 0.4% from -0.5%. Market to watch: CAD crosses
3pm - US ISM manufacturing PMI (November): this is expected to rise to 50.3 from 50.1 in October. Markets to watch: US indices, USD crosses
Wednesday 2 December
12.30am - Australian GDP data (Q3): forecast to be 0.1% for the quarter, from 0.2 in Q2, and 1.9% YoY from 2% in Q3 2014. Markets to watch: ASX 200, AUD crosses
10am - eurozone inflation (November): price growth in the eurozone is expected to be 1% YoY and 0.1% MoM. Market to watch: EUR crosses
1.15pm - US ADP employment change (November): 184K jobs expected to be created in November, up from 182K in the previous month. Markets to watch: US indices, USD crosses
3pm - Bank of Canada rate decision: rates expected to hold at 0.5%. Market to watch: CAD crosses
7pm - Fed Beige Book: this informal survey of the US economy will be useful for gauging confidence among manufacturers. Markets to watch: US indices, USD crosses
Thursday 3 December
1.45am - China Caixin services PMI (November): forecast to rise to 52.1 from 52. Markets to watch: Asian indices, AUD/USD, FTSE mining stocks, copper
9.30am - UK services PMI (November): activity is expected to have slowed slightly, with the index falling to 54.1 from 54.9. Market to watch: GBP crosses
12.45 - ECB rate decision and press conference at 1.30pm: the European Central Bank may well announce plans to increase QE at this meeting, which will be bullish for eurozone indices and likely push the euro lower. No change on interest rates from their current rate of 0.05% is expected, although they may cut rates to amplify their accommodative stance. Markets to watch: eurozone indices, EUR crosses
3pm - US ISM non-manufacturing PMI (November): expected to fall to 58.1 from 59.1. Markets to watch: US indices, USD crosses
Friday 4 December
10am - eurozone GDP (Q3, second estimate): expected to hold at 0.4 Qoq and 1.6% YoY. Markets to watch: eurozone indices, EUR crosses
1.30pm - Canadian employment data (November): 18,300 jobs expected to have been created, down from 44,000 in October, while the jobless rate stays at 7%. Market to watch: CAD crosses
1.30pm - US employment data (November), trade balance (October): 200K jobs are forecast to have been createdm down from October's very strong 271K, and the unemployment rate is expected to hold at 5%. The trade balance is expected to see the deficit widen to $41 billion, from $40.8 billion. Markets to watch: all indices, major currency crosses
Central bank speeches (GMT)
Tuesday 1 December
9.00am – BoE Governor Mark Carney
5.45pm - Fed member Evans
11.30pm - RBA Governor Stevens
Wednesday 2 December
1am - Fed member Brainard
1.10pm - Fed member Lockhart
5.25pm - Fed chair Yellen
8.40pm - Fed member Williams
Thursday 3 December
3pm - Fed chair Yellen
6.10pm - Fed member Fischer