Drivers for the Week of December 12, 2021

December 12, 2021
Here's a look at the main drivers in Developed Markets this week.
  • Two-day FOMC meeting ends Wednesday with a decision; we continue to take issue with market pricing for a terminal Fed Funds rate of 1.5%; updated Dot Plots and macro forecasts are likely to support a more hawkish stance; data highlights this week are November retail sales Wednesday and November PPI Tuesday; Regional Fed manufacturing surveys for December start rolling out; Canada reports November CPI Wednesday
  • ECB meets Thursday; reports suggest some ECB policymakers want to delay this decision due to the uncertainty stemming from omicron; eurozone has a quiet data week; BOE meets Thursday; U.K. also reports some key data; SNB meets Thursday; Norges Bank meets Thursday and is expected to hike rates 25 bp to 0.50%
  • Two-day BOJ meeting ends Friday with a decision; Japan also has a busy data week; Australia reports November jobs data Thursday


The two-day FOMC meeting ends Wednesday with a decision. The Fed is widely expected to accelerate its pace of tapering a mere month after starting it. We expect the pace of tapering to be doubled to $30 bln per month ($20 bln UST and $10 bln MBS). If so, this would see QE end by March. While the Fed has taken pains to try and decouple tapering from liftoff, the market is not having any of that. Fed Funds futures have fully priced in liftoff in Q2, with follow-up hikes in Q3 and Q4 nearly fully priced in. Swaps market sees the Fed Funds rate peaking at 1.5% by end 2023.

We continue to take issue with market pricing for a terminal Fed Funds rate of 1.5%. If inflation were to return to the 2% target, this would imply a negative real policy rate at the end of a Fed tightening cycle, which is something unheard of. If the labor market is as tight as we fear, it seems that the risks to the terminal rate are tilted to the upside. In the September Dots, 1 policymaker saw a longer-term Fed Funds rates of 2.0%, 4 saw 2.25%, 1 saw 2.375%, 9 saw 2.5%, and 2 saw 3.0%. How can markets reconcile this with a 1.5% terminal rate? They can’t, and when markets realize this, that should give the dollar another leg higher.

Updated Dot Plots and macro forecasts are likely to support a more hawkish stance. In the September Dots, 9 policymakers saw no hikes in 2022, 6 saw one hike, and 3 saw two hikes. With several officials coming out in favor of faster tapering, it’s clear that there will be a hawkish shift in the 2022 dots. We can come up with any number of situations where the median for end-2022 shifts to two hikes from one currently, but think it is highly unlikely for the median to shift all the way to three hikes. In the September Dots, 1 saw no hikes by end-2023, 4 saw one hike, 3 saw two hikes, 1 saw three hikes, and 6 saw four hikes. We do not think it would be hard to get a shift in the end-2023 median to four or five hikes from three currently. In light of recent data, we expect core PCE forecasts to be revised higher and unemployment forecasts to be revised lower. We do not expect significant revisions to the growth forecasts.

Data highlight this week is November retail sales Wednesday. Headline sales are expected at 0.8% m/m vs. 1.7% in October, while sales ex-autos are expected at 00.9% m/m vs. 1.7% in October. The so-called control group used for GDP calculations is expected at 0.8% m/m vs. 1.6% in October. Recall that this data series measures sales in nominal terms and so inflation will likely account for the lion’s share any gains. Since headline CPI rose 0.8% m/m in November, we see some upside risks to the sales data.

November PPI Tuesday will also hold some interest. Headline is expected at 9.2% y/y vs. 8.6% in October, while core (ex-food and energy) is expected at 7.2% y/y vs. 6.8% in October. Though markets breathed a sigh of relief after CPI came in as expected last week, the inflation trajectory remains worrisome. While we do believe that price pressures will abate next year, the Fed is doing the prudent thing by tapering faster so that it is well-positioned to hike rates if needed.

Regional Fed manufacturing surveys for December start rolling out. Empire survey kicks things off Wednesday and is expected at 25.0 vs. 30.9 in November. Philly and Kansas City Feds both report Thursday. The former is expected at 29.6 vs. 39.0 in November and the latter is expected at 25 vs. 24 in November. Markit preliminary December PMI readings and November IP will also be reported Thursday. Manufacturing PMI is expected at 58.5 vs. 58.3 in November, while services PMI is expected at 58.7 vs. 58.0 in November. If so, the composite should rise from 57.2 in November. IP is expected at 0.7% m/m vs. 1.6% in October.

Other minor data round out the week. November import/export prices, October business inventories (1.1% m/m expected), and TIC data will be reported Wednesday. Weekly jobless claims and November housing starts (3.0% m/m expected) and building permits (0.4% m/m expected) will be reported Thursday. Initial claims are expected at 195k vs. 184k the previous week, while continuing claims are expected at 1.938 mln vs. 1.992 mln the previous week. We note that another sub-200k reading of initial claims would bring the 4-week moving average back to 2018 and 2019 level, when the U.S. was last at full employment.

Canada reports November CPI Wednesday. Headline inflation is expected to remain steady at 4.7% y/y, while common core is expected to pick up a tick to 1.9% y/y. The Bank of Canada just delivered what we considered to be a dovish hold last week. The policy rate was kept at 0.25%, QE remained in its reinvestment stage, and forward guidance was left unchanged. Recall at the previous meeting October 27, the bank moved up its timetable for the output gap to close to Q2 from H2 previously. Of note, the BOC followed the Fed in dropping its reference to inflation as temporary, and also noted a strong job market and elevated inflation while warning that the omicron variant has “injected renewed uncertainty.” The next meeting January 26 will offer a better opportunity to signal a hawkish shift if needed, as 1) new macro forecasts will be released and 2) the potential impact of omicron will be better known. WIRP suggests 1 in 3 odds of a hike then, rising to 9 in 10 at the March 2 meeting. Swaps market is pricing in 125 bp of tightening over the next twelve months, which strikes us as a bit too aggressive.


The European Central Bank meets Thursday. Madame Lagarde has flagged this meeting for a decision on extending QE beyond March, when PEPP is set to expire. It’s clear from the public comments that policymakers are looking to boost bond-buying with its long-standing APP to make up for the end of PEPP. Net purchases under PEPP have been around EUR15 bln per week recently, or roughly EUR60 bln per month. With APP currently running at around EUR20 bln per month, we think it is likely that the ECB will announced a modest tapering process by increasing APP to EUR50-60 bln per month once PEPP ends. We also know from public comments that many policymakers are against an open-ended timeframe and so the ECB will likely put an expiry date on when APP would return to its regular EUR20 bln monthly pace. Unlike the Fed, the ECB is in no hurry to hike rates and so we expect a 12-month period of elevated APP that is gradually tapered after perhaps six months.

Recent reports suggest some ECB policymakers want to delay this decision due to the uncertainty stemming from omicron. While a delay is possible, we think the ECB will reach some sort of workable consensus this week. OF note, new macro forecasts will be released this week and 2024 will be added to the forecast horizon. Inflation forecasts are likely to be raised, while growth forecasts are likely to be cut. The new 2024 forecast for inflation will be a key factor in its forward guidance. If that forecast remains substantially below the 2% target, it would send a very dovish signal on possible liftoff.

Eurozone has a quiet data week. Preliminary December PMI readings will be reported Thursday. Headline manufacturing PMI is expected at 57.9 vs. 58.4 in November, services PMI is expected at 54.3 vs. 55.9 in November, and the composite is expected at 54.2 vs. 55.4 in November. Both German and French composite are expected to fall a full point or so to 51.2 and 55.0, respectively. Germany reports November PPI and December IFO business climate Friday. PPI is expected to rise 20.0% y/y vs. 18.4% in October, while the headline IFO reading is expected at 95.2 vs. 96.5 in October. Both the current assessment and expectations components are expected to fall to 97.5 and 93.5, respectively. As the virus numbers worsen in Europe, we see greater downside risks to the outlook for Q4 and Q1.

The Bank of England meets Thursday. Recent weakness in the data have led policymakers and the markets to recalibrate their BOE liftoff expectations. WIRP suggests a less than 1 in 4 chance of a hike this week, while a February 3 hike is no longer fully priced in. The data had been weakening even before this latest spike in virus numbers and the ongoing spread of the omicron variant. As such, it wasn’t too surprising that BOE officials have softened their hawkish rhetoric recently. New forecasts were revealed at the November meeting and won’t be updated until February 3. Given such heightened uncertainty, we think it makes perfect sense for the BOE to remain on hold this week. Swaps market is pricing in 100 bp of tightening over the next twelve months, which strikes us as a bit too aggressive.

The U.K. also reports some key data. Labor market data will be reported Tuesday, with unemployment expected to fall a tick to 4.2% in the three months ending in October due to a 224k gain in employment. November CPI will be reported Wednesday. Headline inflation is expected at 4.8% y/y vs. 4.2% in October, while CPIH is expected at 4.4% y/y vs. 3.8% in October. If so, headline would be the highest since November 2011 and further above the 2% target. Preliminary December PMI readings will be reported Thursday. Manufacturing PMI is expected at 57.6 vs. 58.1 in November, services PMI is expected at 57.0 vs. 58.5 in November, and composite is expected at 56.4 vs. 57.6 in November. Lastly, November retail sales will be reported Friday. Headline sales are expected at 0.8% m/m vs. 0.8% in October, while sales ex-auto fuel are expected at 0.8% m/m vs. 1.6% in October.

The Swiss National Bank meets Thursday. It is expected to keep policy steady. At the last meeting September 23, the SNB still characterized the franc as “highly valued” and pledged to continue FX interventions as necessary. Since then, EUR/CHF has fallen another 4% and so the bank may step up its jawboning. We expect upward revisions to the inflation forecasts and downward revisions to the growth forecast. However, the forecast inflation trajectory is unlikely to signal liftoff until 2024 at the earliest. Of note, forecasts for 2024 will be added at the March meeting.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 0.50%. At the last meeting November 4, the bank confirmed its forward guidance that a hike this month was likely. New macro forecasts and an updated rate path will be released at this meeting, and the path is likely to be steeper than the last one from September. If so, it would be a more hawkish signal. Swaps market is pricing in a terminal rate of 1.25% for the policy rate by end-2023. This strikes us as too timid given the tightening path that the bank has set out so far.


The two-day Bank of Japan meeting ends Friday with a decision. Some reports suggest the bank is considering an announcement that it will allow its emergency corporate lending programs to expire in March as scheduled. However, other reports suggest some policymakers would rather delay the announcement until the impact of omicron is better known, perhaps at the next meeting January 18. New macro forecasts will be released then as well, perhaps offering a better opportunity to tweak policy. This week, it should be steady as she goes for the BOJ.

Japan also has a busy data week. The Bank of Japan releases its Tankan survey for Q4 Monday. Large manufacturing index is expected at 19 vs. 18 in Q3, while the large manufacturing outlook is expected at 19 vs. 14 in Q3. Similarly, large non-manufacturing index is expected at 5 vs. 2 in Q3, while the large manufacturing outlook is expected at 9 vs. 3 in Q3. Lastly, large all industry capex is expected at 9.8% vs. 10.1% in Q3. October core machine orders will also be reported Monday and are expected to rise 1.8% m/m vs. a flat reading in September. October tertiary industry index will be reported Wednesday and is expected to rise 1.3% m/m vs. 0.5% in September. November trade will be reported Thursday. Exports are expected to rise 21.4% y/y vs. 9.4% in October, while imports are expected to rise 40.0% y/y vs. 26.7% in October. Preliminary December PMI readings will also be reported Thursday.

Australia reports November jobs data Thursday. A 200k gain is expected vs. -46.3k in October, while the unemployment rate is expected to fall two ticks to 5.0%. The recovery in jobs is to be expected after lockdowns ended this fall. However, the RBA has flagged an unemployment rate near 4% as the likely trigger for higher wage pressures. We are a full percentage point above that and so we see the RBA remaining in dovish mode. Ahead of the jobs data, NAB business conditions index for November will be reported Tuesday, followed by Westpac consumer confidence index for December Wednesday.

Next RBA meeting is February 1. The bank is due to review its QE program then and if the economy remains in solid shape, we think it will announce another round of tapering. Some are calling for an end to QE then but we think that would be too abrupt and would fan market expectations for 2022 liftoff. As it is, swaps market is pricing in 75 bp of tightening over the next 12 months, which is at odds with RBA forward guidance for likely 2024 liftoff. If risks to the economy remain, the RBA may have to push back a bit against market expectations at the February meeting.

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