Many events are happening this week that could affect the markets. There is a good chance that volatility will remain high. The BOC, ECB and BOJ are all meeting this week. With Japan’s intervention last Friday, the BOJ could be the most interesting of central bank meetings! In addition, Liz Truss is absent as Prime Minister of the United Kingdom due to her unsuccessful “mini-budget”, which crippled the UK bond markets. Who will be the next PM? A response is expected by the end of the week. In addition, month-end data will be closely watched, including initial estimates of third-quarter GDP from the US and Germany, as well as US Core PCE. Finally, we’re in the thick of earnings season, which means heavyweights will be reporting this week, including TWTR, MSFT, META, AAPL, and AMXN. Get ready for another exciting week!
The Bank of Canada is expected to raise rates by 75 basis points on Wednesday. The September CPI was released last week and although the stock was down slightly from 7% YoY to 6.9% YoY, it was above expectations. Additionally, the Core CPI fell from 5.8% to 6% in September. With inflation still bubbly, the BOC is expected to rise 75 basis points to bring its overnight rate down to 4%.
The ECB is also expected to raise interest rates by 75 basis points when it meets Thursday this week. Inflation for September was 9.9% yoy versus an August reading of 9.1% yoy. The core CPI for September was 4.8% yoy versus an August reading of 4.3% yoy. Given the sharp increase in inflation data, the ECB is expected to raise rates by 75 basis points to bring the key rate down to 2%.
Japan is on the other side of the coin. The county faces only 3% year-on-year inflation. The Core CPI, which excludes fresh fish but not fuel costs, is also 3%. Therefore, fresh food had no impact on inflation. The Bank of Japan says inflation is mainly due to rising energy costs. As a result, the central bank maintained an easing bias for several years. However, could that change at Friday’s meeting? Last week, USD/JPY hit its highest level since 1990 just below 152.00. Japan intervened in the FX market and took the pair as low as 146.16. In addition, the BOJ intervened the day before on the bond market by buying bonds in order to maintain the cap at 0.25% for the 10-year JGBs. Could the central bank raise the JGB cap to 10 years, or even remove it altogether? This would result in higher yields and a stronger yen, which would lower the rate for yen pairs. Some expect the BOJ to make this bold move, but at the last meeting BOJ Governor Kuroda said he would not change monetary policy for 2-3 years! Therefore, expect the central bank to hold rates at -0.1% and keep the 10-year JGB cap at 0.25%.
The UK’s next PM is…..
After just 45 days on the job, Liz Truss has resigned as Prime Minister of the United Kingdom. Truss offered a “mini-budget” as she tried to implement her economic plan. However, with huge tax cuts, the markets have started to worry about where the funds will come from to cover the costs. The result: 30-year gilt yields above 5% and GBP/USD at an all-time low. However, the BOE intervened in the bond market to help stabilize the economy. Yields fell and GBP/USD rose. Truss initially sacked her head of treasury, Kwasi Kwarteng, hoping it would protect her. However, in the end, the cost was just too high and she was forced to quit last Thursday.
And now? A new PM will be announced on Friday, October 21st. Candidates will need 100 nominations by Monday to be considered for the post of prime minister. There are 357 Conservative MPs. Therefore, the maximum number of candidates can only be 3. Candidates with the best odds as of Friday include ex-Prime Minister Boris Johnson, ex-Chancellor Sunak and the leader of the House of Commons , Penny Mordaunt. Basic members will then select their choice for the next PM of the week. The bookmakers have Johnson and Sunak in a tight race, with Morrdaunt a distant third. However, if a single candidate receives 100 nominations by Monday, the UK will have its next PM after this weekend. It will not be necessary to wait until next Friday. Incidentally, current Chancellor Hunt is due to present his medium-term budget plan on October 31.st and the Bank of England meets on November 3rd. Watch for volatility as the PM picture unfolds. **
This week is one of the most important weeks of earnings season, as many big tech companies are due to release earnings. How well have these companies fared during the period of rising interest rates and presumed slowing demand? FAANG Enterprises, minus Netflix, are all reporting this week. Additionally, heavyweights such as 3M, Boeing, Intel, Caterpillar and Exxon will also release their quarterly reports. Watch for volatility surrounding these announcements. Other companies reporting third quarter results this week include:
TWTR, MMM, GOOG, BIIB, GE, MSFT, KO, GM, UPS, META, BARC, TXN, V, AAPL, BA, F, AMZN, INTC, MCD, CAT, MA, XOM,
The end of the month brings with it month-end data, and the market could move this week. On Monday, preliminary global manufacturing and services PMIs will be released for October. Also, China’s delayed data dump is expected to be released. On Wednesday, Australia will release its third quarter CPI. Towards the end of the week, the US and Germany will release their first look at Q3 GDP, while the US will also release the Core PCE. Other major economic data releases this week include:
- Speech by ECB President LagardeMonday
- China: GDP growth rate (Q3)
- China: Industrial Production (SEP)
- China: Retail sales (SEP)
- China: Fixed Asset Investment (YTD) (SEP)
- China: Unemployment rate (SEP)
- World: Past PMIs in manufacturing and services
- Mexico: Mid-Month CPI (OCT)
- United States: Chicago Fed National Activity Index (SEP)
- Germany: Ifo Business Climate (OCT)
- United States: S&P/Case-Schiller Home Price (AUG)
- United States: CB Consumer Confidence (OCT)
- United States: Richmond Fed Manufacturing Index (OCT)
- New Zealand: ANZ Business Confidence (OCT)
- Australia: CPI (Q3)
- Canada: Bank of Canada decision on interest rates
- United States: New Home Sales (SEP)
- Crude inventories
- UK: Gfk Consumer Confidence (NOV)
- EU: ECB decision on interest rates
- United States: announced GDP growth rate (Q3)
- United States: Durable Goods Orders (SEP)
- United States: Base PCE prices announced (Q3)
- United States: Kansas Fed Manufacturing Index (OCT)
- Japan: unemployment rate (SEP)
- Japan: Tokyo CPI (OCT)
- Australia: PPI (Q3)
- Japan: BOJ decision on interest rates
- Switzerland: KOF Leading Indicators (OCT)
- Germany: Flash GDP growth rate (Q3)
- EU: Economic Sentiment (OCT)
- Germany: CPI Prel (OCT)
- Canada: GDP (SEP)
- United States: PCE Core Price Index (SEP)
- United States: personal income (SEP)
- United States: Personal Expenses (SEP)
- United States: Employment cost index (Q3)
- United States: Pending Home Sales (SEP)
- United States: Michigan Consumer Sentiment Final (OCT)
Chart of the week: USD/JPY daily
Source: Tradingview, Pierre X
USD/JPY has been moving aggressively higher in an ascending sloping channel since early March. September 23rd, USD/JPY was trading near the top of the channel at 145.90 and Japan intervened in the FX markets and bought Yen. The pair fell from 145.90 to 140.35. USD/JPY made its way higher, challenging Japan and pushing the pair back above 145.90. For 12 days, USD/JPY had been moving higher, until Friday. Japan stepped in once again as the pair broke above the upper trendline of the channel and hit an intraday high of 151.94. They sold the pair to a low of 146.16 (only 26 pips lower if they stepped in the first time). If the markets challenge Japan again, the pair could soon return to Friday’s high. Above it is the 38.2% Fibonacci retracement level from the 1982 highs to the 2011 lows near 153.05. The price can then reach 160.40, which is in line with the 1990 highs. However, if USD/JPY continues to decline, the first support is at the previous highs of 145.90, then at the 5th lows. october.e at 142.53. Below that, USD/JPY may fall to lows from the first intervention at 140.35.
The Bank of Canada, the ECB and the Bank of Japan are meeting this week to discuss interest rate policy. Watch the attached statements for any signs of a “pivot” from these central banks. Also, by Friday, markets should know who will be the UK’s next prime minister. Also watch earnings and economic data throughout the week as the results could throw additional volatility into the markets. And as always, traders should keep an eye on Japan to see if it intervenes again in the FX markets, especially Monday morning in the Asian session when liquidity and volume are low.
Have a good week-end!
**As of 5:00 p.m. ET Friday night, Sunak has his 100 nominations