It’s going to be a very interesting week in the financial markets in which we could see the return of the volatility of recent weeks as the Federal Reserve is tasked with making one of the hardest policy decisions for many years.
For anyone doubting just how tough a decision this is, you just have to look at the split that its causing both among market participants and other experts. The World Bank and International Monetary Fund have positioned themselves firmly in the “no hike” camp, warning about the potential ramifications for emerging and financial markets, while some emerging markets central bankers have urged them to get on with it already. Meanwhile the investment community seems equally unsure while policy makers at the Fed appear no more clear. All things considered, it’s no surprise that there’s so much uncertainty and hype around it.
That said, we’re talking about a 25 basis point rate hike that would begin the gradual process of normalization in interest rates and bring the Fed back towards the level that the Bank of England never even breached. When you consider this, it seems to be a lot of hype about nothing. Sometimes people just like to make a song and dance out of everything even if the reality is that it’s not worth the fuss. I think this is what’s happening here and once the hike happens and all of the uncertainty disappears, people will wonder what all of the panic was about.
There are also a number of other key events this week, it’s not just the Fed that is likely to get the markets going again. We have the latest monetary policy decision from the Bank of Japan, another central bank that is expected to be active in the coming months. There are many people calling for an increase in asset purchases this month to try and boost growth with the country currency falling short and inflation not picking up as much as is needed.
The U.K. jobs report will offer further insight into the strength of the labour market with the BoE seen as also not being far away from raising interest rates. Average earnings will be a key component of the jobs report given that this will most influence future core inflation rates in a sustainable way. We’ll also get a look at the inflation picture the day before on Tuesday, with the core CPI reading seen falling slightly to 1%.
U.S. retail sales data later in the day will also be closely followed given the importance of it to the economy and its usefulness in determining future inflation. More spending would generally indicate higher consumer demand and therefore higher prices. There are also a number of other releases to come from the U.S. this week as well including CPI inflation data, housing figures and manufacturing surveys, among others.
It’s not going to be a quiet week for the eurozone either with the latest ECB bulletin due towards the end of the week, as well as inflation data on Wednesday and economic sentiment surveys on Tuesday.
For a look at all of today’s economic events, check out our economic calendar.