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 be slightly hawkish
Analysis: With nine speeches (by six speakers) on the docket, this is a chatty week for Fed policymakers. We expect all this chatter will result in Fed sentiment* breaking from its current neutral posture (momentum** -0.04), with Lael Brainard (speaking on January 17) and Janet Yellen (speaking on January 18 and 19) supplying the week’s highlights. It was widely reported that Brainard had been angling for the role of Treasury secretary in a possible Clinton administration, so, in her speech on monetary and fiscal policy, she will likely not shy away from expressing how the Fed (or at least one Fed policymaker) views the Trump administration’s proposed fiscal stimulus. Yellen’s speeches will likely avoid fiscal policy, but if she continues her recent hawkish trend (momentum 0.38), it may increase market odds of the Fed engaging in all three projected rate hikes in 2017.
European Central Bank
Forecast: Likely to hold rates on January 19
Analysis: The ECB threaded the needle at its last policy meeting by announcing future tapering and continuing asset purchasing all in one motion. Since then, ECB sentiment has remained modestly hawkish (momentum 0.31), so we anticipate that Mario Draghi will continue walking this fine line with contradictory “hawkish later, dovish now” rhetoric in his press conference—likely resulting in moderate or slightly hawkish sentiment. The only wild card here will be how Draghi handles continuing concerns about isolationist trade policies from the U.K. and the U.S. that pose downside risk to longer term projections. If he dwells on these longer run risks, sentiment may turn more dovish.
Bank of Japan
Forecast: Likely to continue modestly dovish trend
Analysis: After a recent bout of moderation, the BOJ is trending dovish again (momentum -0.27). Hiroshi Nakaso, given to hawkish/dovish capriciousness, is the only scheduled speaker this week, so we do not anticipate a great deal of insight into the current trend. Regardless of what sentiment Nakaso expresses on January 20, we expect the modestly dovish trend to persist.
Bank of Canada
Forecast: Likely to hold rates and express concern about inflation on January 18
Analysis: With sentiment nosediving (momentum -0.48), inflation softening at year-end (down to 1.2%), and growing concerns about the trade policies of the incoming U.S. President, a BOC rate hike is completely off the table. Nevertheless, Bank of Canada policymakers are under pressure—since the Fed raised rates—to explain the diverging policies between neighboring economies. The likely result: a modestly dovish policy statement coupled with moderate sentiment from Poloz and Wilkins at their press conference.
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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