Euro-zone Summit to Dominate Markets' Attention; US GDP on Tap
As the calendar turns towards the last full week of October, not much changed by way of broader market sentiment in the third week of October. Unlike last week, when one major trend was broken – markets characterized by exceptional volatility – the recent trend of markets ‘headline’ trading, or fear-based trading, continued. This past week some negative stories came across the newswires, with the most notable development being the announcement by the German leadership bloc that they don’t expect a deal to materialize at the Euro-zone’s October 23 summit. This weighed on market sentiment for no more than a few hours, when it was announced that a resolution would be reached by a second summit, scheduled for October 26. From now until next Wednesday, any developments on the Euro-zone debt crisis will dominate markets’ collective attention, with good reason.
In terms of scheduled event risk, there are numerous data releases on the docket which will likely add fuel to what is expected to be an exceptionally volatile week. In particular, there are inflation data out of Australia and New Zealand due at the start of the week, which should garner more attention than other consumer price index releases, as these prints are only released quarterly. For both nations, markets are pricing in inflation rates that cooled in the third quarter; a confirmation of easing price pressures could weigh on interest rate expectations, ultimately bringing down expected yield on Australian Dollar and New Zealand Dollar denominated assets.
There are also two rate decisions, with the Bank of Canada up on Tuesday followed by the Bank of Japan on Thursday; neither bank is forecasted to change their key rates, though commentaries following the releases remain crucial. Capping off the week is the final revision to the headline growth figure in the United States, which is expected to show a drastic improvement over the original figure.
CAD Bank of Canada Rate Decision: October 25 – 13:00 GMT
The Bank of Canada is widely expected to keep its rates on hold at 1.00 percent at its policy meeting on Tuesday, as the recent trend of deteriorating fundamentals for the world’s eleventh largest economy has been broken. Inflation remains well-contained, the housing sector is relatively strong, and the labor market has showed signs of growth in recent months. In fact, the October 7 labor market reading showed that the unemployment rate dropped back to 7.1 percent in September, from 7.3 percent in August; this is the lowest such rate since December 2008, when the unemployment rate was 6.8 percent. While inflation ticked slightly higher in September, up to 3.2 percent on a yearly basis, this in part has been due to a weaker Canadian Dollar.
The Credit Suisse Overnight Index Swaps are pricing out 0.8-basis points over the next 12-months, and there is a miniscule 3.0 percent of a 25.0-basis point rate cut at Tuesday’s meeting. Given recent global developments and how they have affected the Canadian economy, I fully expect the Bank of Canada to employ a dovish tone at coming meeting, though steer clear of talks of lower rates in the future. Join a DailyFX analyst for live coverage of event!
USD Consumer Confidence (OCT): October 25 – 14:00 GMT
Consumer confidence is expected to remain below 50.0 after falling below the key level in August. This was the first time the reading came in below 50 since last October. September’s reading was slightly improved from July’s at 45.4 from 45.2, but the trend remains firmly to the downside; consumer confidence peaked at 72.0 in February. Such an occurrence wasn’t necessarily a surprise, especially given the state of U.S. politics and the downgrade of long-term U.S. government debt in early September. With the economy showing little signs of improvement over the medium-term, confidence is likely to remain lower for the coming periods. Looking ahead, October’s reading isn’t expected to inspire much confidence either, with a Bloomberg News survey showing a forecast of 46.5.
The worsening debt crisis in Europe is likely to have an increasing effect on consumer confidence, in a ‘trickle-down’ sort of way; as equity markets continue to head lower on contagion concerns, sentiment will deteriorate, despite the fact that the influence is mostly exogenous, at least to American consumers.Similarly, market participants should be aware of the fact that the Congressional committee in charge of presenting another solution to the debt ceiling has a deadline coming up in November, which could weigh on sentiment further down the road as debates over how to reduce American spending increases in the coming weeks.
AUD Australia Consumer Price Index: October 26 – 00:30 GMT
According to a Bloomberg News survey, economists forecast the Australian consumer price index to show signs of easing price pressures, with the median estimate calling for a 0.8 percent gain in third quarter, on a quarterly basis. Year-over-year, the index is expected to show that price pressures fell to a 2.9 percent clip, from 3.4 percent in the third quarter a year ago. As per the Reserve Bank of Australia’s Board minutes from their recent policy meeting, stating “revised measures showed recent outcomes for underlying inflation lower than those previously published.” Similarly, the minutes noted that “the inflation outlook appeared less concerning than was the case a few months ago.” Considering global growth showed signs of weakening in the third quarter, inflationary pressures do indeed to be tailing off for the Australian economy. If inflation is indeed suppressed, the likelihood for a rate cut in the future would increase. Currently, the Credit Suisse Overnight Index Swaps are pricing in a 78.0 percent chance of a rate cut at the RBA’s next meeting in November. Join a DailyFX analyst for live coverage of event!
NZD Reserve Bank of New Zealand Rate Decision: October 26 – 21:00 GMT
At its last meeting on September 14, the Reserve Bank of New Zealand decided to maintain its key benchmark interest rate at 2.50 percent, on the outlook that “global economic and financial risks have increased.” Still, the central bank noted in their policy assessment that “domestic economic activity has surprised to the upside,” a welcome development following the earthquakes that struck major metropolitan areas over the past few months. The relative strength of the New Zealand economy has led to a particularly strong New Zealand Dollar throughout 2011 thus far, which as the central bank noted was “having a dampening influence on some other parts of the tradable sector and on imported inflation.”
The Credit Suisse Overnight Index Swaps are pricing in 41.0-basis points over the next 12-months, and there is a slight 2.0 percent of a 25.0-basis point rate cut at Wednesday’s meeting. Nonetheless, it was determined that “if recent global developments have only a mild impact on the New Zealand economy, it is likely that the [key interest rate] will need to increase.” Accordingly, if volatility calms due to positive developments out of Europe, the RBNZ appears supportive of a higher interest rate and thus a stronger Kiwi in the future. Join a DailyFX analyst for live coverage of event!
USD Gross Domestic Product (Annualized) (3Q A): October 27 – 12:30 GMT
The U.S. economy is expected to have experienced faster economic growth in the third quarter of 2011, with the first gross domestic product figure forecasted to show a 2.5 percent rate of expansion. The print is a notable improvement over the final reading from the second quarter, when growth was barely above 1.0 percent, at 1.3 percent at an annualized pace. Taking a look back to the previous prints, growth stalled in the first quarter of the year, at a paltry 0.4 percent print; growth was above 2.3 percent in the second half of 2010; and growth was above 3.8 percent from the fourth quarter of 2009 through the first half of 2010.
There’s been a slight upturn in data in recent weeks, with most of the positive data coming towards the end of September. Factory orders fells slightly in August after surging in July, while the ISM Manufacturing index barely held in expansionary territory, down to an average of 51.0 in the third quarter from 56.4 in the second quarter. On the other hand, consumer spending made a bit of a comeback in the third quarter, which is supportive of a stronger GDP print. Accounting for nearly 70 percent of the headline figure, consumption is the most important component of the overall growth reading. Thus, while growth appears to have picked up in the third quarter, the 2.5 percent forecast looks overly enthusiastic. Accordingly, a reading lower should not come as a surprise. If that should be the case, the U.S. Dollar would find bids higher, especially against the Canadian Dollar. Join a DailyFX analyst for live coverage of event!
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--- Written by Christopher Vecchio, Currency Analyst
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