Welcome to The Signal’s “Macrocast.” Each week, we provide analysis and forecasting on the most important upcoming central bank communications.
Forecast: Chatter to continue to point to a December rate hike
Analysis: With 17 speeches scheduled, this will be the most talkative week of the year for the Fed. Prattle expects Yellen’s November 17 testimony before the Congressional Joint Economic Committee to be the biggest market mover of a busy week. Yellen will dodge questions about the political independence of the Fed…while still making the case for an improving economy to justify a December rate hike. These remarks are likely to be hawkish but more restrained than speeches by some other Fed policymakers. Those speeches will likely drag the Fed’s neutral sentiment* (momentum** 0.04) further into hawkish territory, signalling a December hike.
European Central Bank
Forecast: Chatter to reveal anxiety about U.S. politics and downside risk to European economy
Analysis: After a fairly hawkish early fall, ECB sentiment has declined over the last couple weeks. We expect this decline will continue as speakers express anxiety over the risks posed by the tough trade talk of the incoming U.S. President. Several speakers might also raise concerns about the weakening euro and suggest a need for rate hikes to bolster the currency. Although ECB momentum (0.22) remains hawkish enough to support this view, declining trend and continued political uncertainty suggest it is unlikely that any speaker will forcefully state the need for immediate hikes.
Bank of Mexico
Forecast: Likely to hike rates 50bps on November 17
Analysis: The combination of inflation rising above the bank’s 3% target and dramatic declines in the Mexican peso on the heels of the Trump election suggest that the Bank of Mexico is poised for another rate hike. Momentum remains hawkish (0.22), but, given the tough campaign talk about curtailing free trade between the U.S. and Mexico, Mexican central bankers may pause before taking further steps to fight inflationary pressure. While our call is for a hike, a hold with hawkish rhetoric is not out of the question.
Bank of Japan
Forecast: Kuroda to exhibit optimism spurred by weakening yen
Analysis: Recent sentiment from the BOJ suggests a stable—albeit somewhat dovish—trend (momentum -0.33). While we expect both Kuroda and Nakaso to reinforce this slightly dovish trend, Kuroda is likely to be a bit more optimistic than his recent communications. Yen declines since the U.S. Presidential election are likely to bolster Kuroda’s views on the Japanese economy, and, if these declines can be sustained, it might even suggest the BOJ could hit its newly (downward) revised inflation target.
Reserve Bank of Australia
Forecast: Minutes to reflect less dovish sentiment and concerns about rising home prices
Analysis: Sentiment from RBA officials appears to be rebounding after a long dovish stretch. We expect the minutes released on November 14 to be neutral as concerns about a potentially overheating housing market balance broader concerns about low inflation. We anticipate that the minutes will yield a residual*** score slightly below zero.
Bank of Canada
Forecast: Communications to suggest steady, moderate sentiment
Analysis: With just one speech and the release of their biannual monetary policy review this week, the Bank of Canada’s week is quiet compared to its peers. We anticipate that the BOC review document will score a bit more hawkish than the bank’s general dovish tone (momentum -0.19) in recent months.
Swiss National Bank
Forecast: Speeches to highlight need to keep franc at reasonable value
Analysis: Recent SNB sentiment has taken a hawkish turn, but, with the Swiss franc rising on the heels of the U.S. election, the rise in sentiment might be short lived. This week’s speeches from Maechler and Moser should provide valuable insight into whether the bank intends to intervene to keep the franc from becoming too strong.
Forecast: Ingves to continue trend toward neutral sentiment
Analysis: The big market mover from the Riksbank this week will be Stefan Ingves’ testimony before the Riksdag Committee on Finance. This speech will likely reinforce the bank’s recent neutral sentiment. While we anticipate Ingves to be fairly neutral, expect him to also indicate that additional easing is not off the table.
* 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 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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