With something of a dearth of significant US economic data this week, the big focus will turn on the European Central Bank (ECB) monetary policy as the prospect of tapering asset purchases continues to be speculated. Is it too soon this month? With the slide in the dollar resuming we look at the outlook for forex, equities and commodities.
Central banks have resumed as the drivers of market sentiment. As is often the case, it is the direction of travel that is key. It is interesting to see the outlook of the Federal Reserve is suddenly looking less hawkish than previously thought. Janet Yellen’s bi-annual testimony to Congress reveals that there is a concern that sluggish inflation may in fact not be as “transitory” after all and that the FOMC stands “to adjust policy if it appears this inflation undershoot appears consistent”. FOMC policy is not on a pre-set course and the committee will be watching inflation carefully. So, we must also watch the data then. The path of inflation through the past few months has been consistently lower and there is now confirmation that this could cause the Fed to take its foot off the gas. CME Group FedWatch expectation of a December hike is now around 50/50 and it is interesting to see a subsequent hike possibly into H2 2018. The market does not believe the Fed can follow through with the current dot plots which suggest three hikes in 2018 and three hikes in 2019. The dollar continues to correct the “Trump bump”. But this is coming as other central banks begin to move away from ultra-loose monetary policy. The Bank of Canada began to hike last week and ECB rhetoric is setting up for a move towards tapering later in the year. The one central bank not playing the game though is the Bank of Japan which is likely to be confirmed once more this week.