Welcome to The Signal’s “Macrocast.” Each week, we provide analysis and forecasting on the most important upcoming central bank communications.
Forecast: Chatter likely to point to a December hike
Analysis: Although the Fed has only been mildly hawkish* recently (momentum** 0.24), we expect that the tone of this week’s speeches—emboldened by excellent employment data—will firmly point to a December rate hike. Pay particular attention to Dudley’s (momentum 0.13) speech on December 5, but Evans (12/5) and Bullard (12/6) are both likely to point toward a hike as well.
European Central Bank
Forecast: Likely to extend QE on December 8, signal 2017 tapering
Analysis: Despite steady, slightly hawkish momentum (0.31) from the ECB, market volatility caused by Brexit and the U.S. Presidential election suggests the bank is unlikely to announce immediate tapering on December 8. Draghi will probably use his press conference to cite persistently low inflation as the rationale for continued asset purchases, but he is also likely to signal that the end of QE is in sight. His hints at tapering QE will likely cause the market to interpret the extension of stimulus (already largely baked in) as somewhat hawkish…even as the short-term policy is dovish.
Bank of Japan
Forecast: Iwata likely to echo Kuroda’s speech
Analysis: After Kuroda’s speech at the International Financial Forum (residual 0.80), Deputy Governor Iwata (speaking on December 6) is unlikely to deviate from the new, modestly hawkish BOJ script.
Reserve Bank of Australia
Forecast: Likely to hold rates on December 6
Analysis: After a dramatic decline in early/mid-2016, the RBA’s tone has leveled off in recent months. This suggests that a rate hold is the likely outcome of its December 6 policy meeting. That said, projections point to dismal Q3 GDP growth in Australia, so we anticipate a rather dovish statement indicating the RBA stands ready to drop rates again in early 2017.
Reserve Bank of India
Forecast: Likely to cut rates by 25bps on December 7
Analysis: With the Indian economy reeling from demonetization reforms affecting currency in circulation, we expect to see a modestly stimulative 25bps rate cut. The RBI may also signal additional cuts in 2017, as longer run growth is decelerating. That said, the prospect of weakening the rupee in the face of a strengthening U.S. dollar may dissuade RBI policymakers from further cuts.
Bank of Canada
Forecast: Likely to hold rates on December 7
Analysis: Consistent with anxiety over the economic effects of potential trade barriers between the U.S. and Canada (as strongly endorsed by the U.S. President-elect), the BOC has taken a stable, somewhat dovish position (momentum -0.39). These nerves and dovish posture are counteracted by better-than-forecast GDP growth in Q3-2016 and an OPEC agreement to cut oil production (which caused a pop in oil prices last week). Given these countervailing indicators, we expect the bank to hold rates while signaling a willingness to cut further if necessary.
Forecast: Likely to suggest inflation targeting is not working
Analysis: Speaking on December 7, Per Jansson will discuss the merits of inflation targeting and likely allude to the fact that it has done more harm than good—diminishing the central bank’s credibility and constraining its policy options while not doing much to achieve optimal inflation. The speech may also provide a roadmap to upcoming policy changes and how they intend to back out of negative interest rates.
The Signal Team
* 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.
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