Macroeconomics: The Day Ahead for 26 January

While geopolitical tensions will continue to cast a very long shadow over markets, today will still be all about the FOMC and to a much lesser extent the Bank of Canada policy meetings, with a very light schedule of second tier offering little in the way of distractions, amounting to little more than digesting French Consumer Confidence, with US New Home Sales, Goods Trade Balance, Wholesale Inventories and Brazil’s IPCA-15 Inflation ahead. US corporate earnings are again plentiful with Tesla taking centre stage, while others likely to be among the headline makers are: Abbot Laboratories, AT&T, Boeing, Freeport McMoRan, Intel, Kimberly-Clark, Norfolk Southern and Seagate. A busier day for govt bond auctions has Italian 2-yr ZERO and I-L, UK I-L 30-yr, German 10-yr and US FRN 2-yr. The metals sector will also cast an eye in the direction of the Fitch and TD Securities mining conferences/webinars.

** U.S.A. – FOMC meeting **

– The consensus looks for no changes in either rates or taper pace from the FOMC, and with no forecast updates at this meeting, markets will pore over the FOMC statement and Powell’s press conference. The Fed has shifted its policy stance relatively dramatically over the past two meetings, carving itself some room for manoeuvre, and while it will offer some clearer forward guidance, it will try and avoid painting itself into any corners, primarily by emphasizing downside risks and extant uncertainties, as well as how financial conditions evolve in response to the start of the policy tightening cycle. A hefty hint of a March rate hike will be given, with a key question at the press conference likely to be whether be a 50 bps rate hike is a possibility (seemingly unlikely given current market volatility), which Powell will lean against heavily, without completely ruling it out, whether there has been a shift in ‘dot plot’ on the rate trajectory. Just as importantly, markets want some clues on when the Fed will start reducing the size of its balance sheet, and some greater clarity on what ‘sooner and somewhat faster’ means, and how that would play out in terms of mitigating the need for a more aggressive stance on rates. A more detailed outline of its balance sheet plans will almost certainly have to wait for the March meeting. The narrative on the economy will probably emphasize that the US labour market is very tight, with any near-term loosening to be temporary along with any slowdown in growth, but that supply chain disruptions will last longer, add to inflation pressures and be a headwind for growth, but that underlying demand will remain robust. Market reaction may again hang on the meme narrative, though plenty more volatility during the presser looks to be ‘baked in the cake7’, with a possibility that the infamous ‘dovish hike’ (a total oxymoron) re-establishes itself, perhaps especially if Powell leans hard on favouring balance sheet reduction (QT) over rate hikes. In that respect, it should be remembered that as and when the Fed does start QT, the colossal outstanding volume of Fed Reverse Repos (current $1.599 Trln) will act as a considerable buffer in the initial phase. Surprisingly given the anticipated shift, there are at the time of writing, no other Fed speakers scheduled this week, though this looks likely to change.

** Canada – BoC rate decision **

  Ahead of the Fed meeting, the Bank of Canada is expected to hold rates at 0.25%, though markets are still discounting a 64% probability of a ‘surprise’ hike. This ia a Monetary Policy Report meeting, and given that supply side pressures on inflation and inflation expectations (as seen in last week’s Q4 Business Conditions survey), Macklem & Co are likely to ditch their prior focus on the ‘output gap’, and guidance of a first rate hike in the ‘middle quarters’ of 2022, and instead emphasize the need to manage inflation risks, and hint strongly at a March 2 rate hike. Accompanying MPR forecasts are likely to see near-term CPI forecasts revised higher, but growth revised lower, as well as anticipating that longer-term output gap pressures justify a tighter policy stance. As with the Fed, there will also be some focus on signals on when the BoC may start to reduce the size of its balance sheet, with many expecting this to start towards the end of Q2.