The Empire Hikes Back | MACROCAST

  • Monday, December 12, 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 hike rates 25bps on December 14
Analysis: The sharp rise in Fed sentiment* through the second half of 2016 points firmly toward a December hike. Although trend has dipped in recent weeks, sentiment is still higher than it was when the Fed hiked in December of 2015. These sentiment levels—along with strong financial conditions and continued signs of growth in the labor market—suggest that the Fed will raise rates again.

Prattle’s statistical forecasting model projects that this week’s FOMC statement will carry a residual** score of 0.44. This would be the highest residual score of any FOMC statement in the last year and would mark a continuation of the hawkish shift we have seen in recent months. If the statement is this hawkish, it is likely to spark speculation about a steeper rate hike path in 2017, making the Summary of Economic Projections the real star of this week’s FOMC meeting.

Bank of England
Forecast: Likely to hold rates on December 15
Analysis: Although the bank’s momentum has declined slightly in recent weeks, it still sits close to neutral (-0.06). This level signal combined with a surprisingly resilient post-Brexit UK economy suggests a rate hold is likely. The multiple signs that inflation is rising in the UK also support the contention that further stimulus is unlikely in the near future.  

Bank of Korea
Forecast: Likely to cut rates 25bps on December 15
Analysis: The combination of political uncertainty (stemming from the recent Presidential impeachment) and falling growth (revised down from 2.7% to 2.4%) will likely force the Bank of Korea to cut rates this week.

Many had speculated the bank would not cut rates further in 2016, suggesting that it would cut 2 or 3 times in 2017 instead. But, with sentiment roughly neutral, growth slowing, and political turmoil rattling the Korean economy, a rate cut this week is significantly more likely than previously projected.

Swiss National Bank
Forecast: Likely to hold rates on December 15
Analysis: SNB sentiment has been steadily rising since a localized trough in mid-October (momentum 0.13). Despite policymakers’ continued concerns about the strength of the Swiss franc, this sentiment data suggests the bank is unlikely to drop rates further or acknowledge currency market intervention. A rate hold coupled with a moderate statement is likely all we will see this week.

Norges Bank
Forecast: Likely to hold rates on December 15
Analysis: Norges bank sentiment has declined since late October…but still remains on the hawkish side of neutral (momentum 0.40). This suggests policymakers will hold rates and express near-neutral sentiment this week. That said, the new rate path projection is likely to reflect these recent sentiment declines with a somewhat lower rate path for 2017.

Bank of Mexico
Forecast: Likely to hike rates 50bps on December 15
Analysis: With inflation at a 2-year high (and more than 100bps above target) on the heels of a 50bps rate cut in November, outgoing Bank of Mexico President Carstens is likely to raise rates again. Because Carstens has shown a willingness to be aggressive in fighting inflation, a 50bps hike is highly likely.

Bank of Canada
Forecast: Slightly dovish chatter likely to continue
Analysis: The financial system review and press conference by Poloz and Wilkins are likely to echo the bank’s recent, slightly dovish chatter (momentum -0.43). While the recent rise in oil prices may temper the tone somewhat—pushing it closer to neutral—continued uncertainty about trade due to the incoming U.S. President will likely still weigh on BOC sentiment.

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 the 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 of the last ten residual scores.

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.

Copyright © 2016 Prattle Analytics, LLC.