4 Policy Meetings, 4 Holds | MACROCAST

  • Friday, October 28, 2016

Welcome to The Signal’s “Macrocast.” Each week, we provide analysis and forecasting on the most important upcoming central bank communications.


Federal Reserve
Forecast: Likely to hold rates and signal December hike on November 2
Analysis: Although aggregate sentiment* trend** is now at its highest point since last December’s hike and despite surprisingly good Q3-GDP numbers, it’s unlikely we’ll see a rate hike at this week’s FOMC meeting. The dispersion of scores for recent Fed communications have resulted in near neutral momentum*** (0.01), and that, coupled with the fact that this is an off-cycle FOMC meeting****, suggests this meeting is the final setup for a December hike. The speakers later in the week (Lockhart, Kaplan and Fischer all on the 14th) will likely reinforce this timing.


Bank of Japan
Forecast: Likely to hold rates and lower inflation forecast on November 1
Analysis: The recent shift in the BOJ’s policy framework has resulted in a significantly more stable aggregate sentiment trend (currently -0.35). We have also seen less dispersion in the BOJ’s communication scores over the last two months. This suggests the bank’s leadership is coalescing around the wait-and-see mentality, but the dovishness of the bank’s raw score and its momentum (-0.17) both suggest it will have to come to grips with lower inflation.

Reserve Bank of Australia
Forecast: Likely to hold rates and signal readiness to cut on November 1
Analysis: Since the substantial decline in aggregate sentiment trend leading into the October 3 policy meeting, the RBA’s trend has stabilized—even rebounded (slightly). This rebound coincides with an encouraging pickup in inflation. If this rise in inflation is sustained, the RBA may not need to cut further in the near future. However, the bank’s momentum is still very dovish (-1.31), and we expect signs that the RBA remains ready to cut if inflation needs a boost.

Bank of England
Forecast: Likely to hold rates and signal continued readiness to cut
Analysis: Although Brexit has continued to cast a dark shadow over the British economy, BOE sentiment has stabilized (momentum 0.12). Accordingly, we expect the BOE will hold rates and continue to signal willingness to engage in further stimulus should growth slow further.

European Central Bank
Forecast: Speeches to provide modestly hawkish outlook
Analysis: Both Cœuré and Constâncio are speaking to international audiences this week, and we anticipate them to express a general theme of Eurozone stability and slight optimism. With ECB momentum holding at slightly hawkish (0.15), these speeches are unlikely to make waves.

Bank of Canada
Forecast: Likely to carefully signal possible stimulus
Analysis: After a wild week of CAD trading, Stephen Poloz will look to right the ship with carefully crafted remarks. Poloz will likely reiterate that the policy framework the BOC has set forth will be in place for 18 months, but that the bank could still act during that time. The BOC’s raw score has steadily declined since mid-September and its momentum is now below zero (-0.04); if this trend continues, a rate cut may be impending.

Norges Bank
Forecast: Likely to express continued concern about housing market
Analysis: After holding rates last week, Olsen expressed concern that the Norwegian housing market could be entering bubble territory. We expect more of this hawkish sentiment as the Norges bank momentum is somewhat hawkish (0.30), and Olsen himself is even more hawkish (momentum 0.51).


The Signal Team

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* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness.

** Aggregate trend is the overall sentiment of the bank calculated using a LOESS fitting of trend using a 12 month window.

*** Residual scores represent the tone of a communication compared to the rolling, 12-month average for that individual communication type or speaker. Raw scores represent the tone of a communication compared to the average of all communications. Momentum is the average the last ten residual scores.

**** Off-cycle meetings do not include press conferences and or an updated Summary of Economic Projections

Disclaimer: the forecasts provided herein are based upon sources believed by Prattle Analytics, LLC D/B/A Prattle, to be reliable and to be developed from models which are generally accepted as methods for producing economic forecasts.

Prattle cannot guarantee the accuracy or completeness of the information upon which this Report and such forecasts are based. This Report does not purport to disclose any risks or benefits of entering into particular transactions and should not be construed as advice with regard to any specific investment or instance. The opinions and judgments expressed within this Report made as of this date are subject to change without notice.

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