BoJ Meets Amid Normalization Talk; U.S. Tax Vote Main Focal Point

Central bank activity will continue next week with policy meetings of the Bank of Japan and Sweden’s Riksbank. It will be a relatively quieter one though for economic indicators, except in the United States, which will see several big data releases, including personal consumption expenditure figures, housing numbers and durable goods. But happenings in Capitol Hill could once again attract more attention as Congress votes on the final version of the tax bill.

No change expected from Bank of Japan

After a busy week of central bank meetings, it will be the turn of the Bank of Japan to hold its last policy meeting of the year on Wednesday-Thursday. With core CPI running at just 0.8% and repeated downgraded revisions to BoJ inflation forecasts, the Bank of Japan is expected to be the last of the major central banks to exit its stimulus program. However, BoJ officials have been making some noise recently about the negative impact of a flat yield curve and low interest rates, generating some talk in the market that the BoJ could surprise by tightening policy sooner than anticipated. Investors will therefore be monitoring next week’s meeting for any clues about such concerns. The yen would likely get a major boost from any shift in BoJ policy, though such a signal is unlikely to come at next week’s meeting or in the near future, especially with the Bank’s board now entirely comprising of doves.

New Zealand GDP in focus

The New Zealand dollar has steadied in recent weeks after touching a near 1½-year low in November. The kiwi’s downtrend was driven more by uncertainty about the new Labour-led government’s economic policies and planned reforms to the RBNZ, as well as narrowing yield spreads with the US, than any significant shift in the country’s economic fundamentals. GDP data due on Thursday may serve as a reminder to investors that New Zealand remains one of the faster growing advanced economies, although some analysts are forecasting slower growth during the third quarter from the second quarter’s 0.8% quarter-on-quarter rate due to weaker dairy output. A disappointing reading could stall the kiwi rally, whereas a strong figure could help the currency advance its gains beyond this week’s near 2-month highs.

German Ifo to hold at all-time high; Riksbank decides on QE

The ECB on Thursday maintained its pledge to keep its asset purchase program open-ended even as incoming data points to a strengthening economic backdrop in the euro area. The Ifo’s business survey out of Germany next Tuesday will likely be further evidence of this. The Ifo business climate index is forecast to stay at the record high of 117.5 in December. Other Eurozone indicators next week will include the bloc’s final November inflation reading on Monday and the flash December consumer confidence index on Thursday.

Also to keep an eye on is the Riksbank’s policy meeting on Wednesday. Sweden’s central bank refrained from tightening policy in October despite the ECB’s announcement to halve its asset purchases and thereby relieving upside pressure on the Swedish krona. At its December meeting, the Riksbank will probably hold rates at -0.5% but will also have to decide whether to extend its owns bond-buying program. If policymakers opt to follow in the footsteps of the ECB and reduce the size of bond purchases rather than end the program altogether, the Swedish krona could accelerate its year-to-date declines versus the euro.

Canadian inflation and retail sales eyed for rate clues

The Bank of Canada’s governor, Stephen Poloz, this week fuelled expectations of a rate hike in the first quarter of 2018, helping the Canadian dollar climb to a one-week high against its US counterpart. With the Bank of Canada being in data-dependent mode, inflation and retail sales numbers on Thursday will be watched for signs that the economy is operating nearer its full capacity. Inflation moderated to 1.4% year-on-year in October but the BoC expects it to pick up to 2% in late 2018 so will want to stay ahead of the curve. Stronger-than-expected data in the coming weeks could therefore push the loonie back towards its 2017 high of C$1.2057 per US dollar.

Also important next week will be the monthly GDP reading for October on Friday.

PCE inflation and durable goods to highlight packed US calendar

It will be a busy seven days for economic data in the US but the ongoing wrangling over tax reforms look set to remain as the main driver for the greenback. The Senate and House of Representatives are expected to vote next week on the final version of the tax legislation, which in its latest form is still short of the support it needs from Republican senators. Failure of the bill to pass in the Senate or for the vote to be pulled would make it very difficult to complete its passage in Congress before the year end. Such an outcome could trigger a sharp sell-off of the dollar.

However, whatever the developments on the tax front, next week’s data should provide underlying support for the US currency. The focus early in the week will be on the housing market, with building permits and housing starts released on Tuesday, followed by existing home sales on Wednesday and new homes sales on Friday. The final estimate of third quarter GDP will be published on Thursday with no revision expected to the prior estimate of 3.3%. The Philly Fed manufacturing index is also due on Thursday.

On Friday, the November reports for personal consumption expenditure (PCE) and durable goods will be watched closely. Personal income is expected to grow by another solid 0.4% month-on-month in November after similar growth in October, while personal spending is forecast to rise by 0.5% versus 0.3% in the prior month. The Fed’s preferred gauge of inflation – the core PCE price index – is expected to inch up to 1.5% year-on-year in November. At its December meeting, the Fed maintained its projections of three more rate hikes in 2018 despite PCE inflation having been in a downtrend for much of 2017. However, with some signs that it has bottomed out, a move back towards 2% would give the Fed greater confidence to move at a faster pace with its rate hikes.

Finally, durable goods orders are expected to rebound by a robust 2% m/m in November, more than making up for the 0.8% drop seen in October.

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