Macro The Week Ahead

Stocks Face Perfect Storm of Macro Risk on FOMC, ECB and BOE Meetings: Macro Week Ahead

By:Ilya Spivak

Stock markets are at risk and the U.S. dollar may continue to recover against the euro and the British pound as the Federal Reserve, the European Central Bank and the Bank of England deliver policy updates.

  • U.S. CPI inflation data may stir volatility, but key moves will likely wait for the Fed.
  • Stocks may fall as the U.S. dollar gains if the FOMC sticks to the familiar policy script.
  • Euro, British pound at risk if the ECB and BOE leave dovish policy bets unchallenged.

A mixed performance left financial markets without much progress last week.

Wall Street continued to idle, with the bellwether S&P 500 and the high-flying Nasdaq stock indices little changed. Treasury yields recovered a bit of lost ground after blistering losses in the previous week. Gold prices were similarly in correction mode, clocking in a loss.

The U.S. dollar scored a notable gain of 1%, building on the prior week’s advance. Crude oil prices fell for a seventh week in a row, dropping to a four-month low.

Here are the key macro waypoints for traders in the week ahead:

U.S. consumer price index data

Inflation is expected to have edged a bit lower in November. The headline price growth rate is expected to be 3.1% year over year, the lowest since March 2021. Analysts expect the core measure excluding volatile food and energy prices—the focus for Federal Reserve policy makers whose main target are sticky service-sector prices–to hold steady at 4%.

November was marked by a sharply dovish shift in monetary policy expectations. Investors now have the first 25-basis-point (bps) interest rate cut fully priced in for May and envision at least four of them by year-end. The implied probability of a fifth one—bringing the easing tally to 125bps—is at a hefty 45%. October’s soft CPI print helped bring this on.

Any deviation from established forecasts interpreted as endorsing or countering this shift is likely to generate volatility across financial markets. Follow-through and trend development may be limited however, with traders reluctant to show conviction before hearing from the U.S. central bank itself just one day later.

U.S. consumer price index Y/Y
Source: Bloomberg

Federal Reserve monetary policy announcement

This week, the U.S. central bank’s policy-setting Federal Open Market Committee (FOMC) will deliver its final policy decision of 2023. The markets are thoroughly convinced that the target lending rate will remain unchanged. Fed Funds futures price in the probability of a change at this meeting at a mere 1.2%.

This puts the spotlight on updated economic and interest rate forecasts as well as the post-meeting press conference with Fed Chair Jerome Powell. Officials have showed with great effect how communicating through these channels can push markets to deliver on policy outcomes without interest changes in September and November.

Markets have shown that they’ve started to look through policymakers’ familiar disclaimers about the primacy of containing inflation and readiness to resume tightening if need be. Such rhetoric now seems baseline, with traders focusing on any marginal tone adjustment that might hint at the scope and timeline for incoming rate cuts.

Opting against changes in the forecasts or the commentary may be seen as a signal by itself, suggesting that markets have somewhat overreached. That could hurt stocks, bonds, and gold prices while nudging up the U.S. dollar.

U.S. market-implied policy rates
Source: Bloomberg

European Central Bank (ECB) and Bank of England (BOE) meetings

Policy announcements from Europe’s top central banks follow right on the heels of the FOMC. Both are expected to remain on hold while official communications set the stage for the start of an easing cycle. The markets see the ECB starting to deliver rate cuts by April. The BOE looks likely to join the fray in June, and no later than August.

Growth is anemic in both economies, though leading purchasing manager index (PMI) data suggests the UK managed to return to growth in November after three months of shrinking economic activity. The Eurozone remained in contraction mode for a fifth consecutive month in the meanwhile.

Against this backdrop, disinflation has picked up pace on both sides of the English Channel. The markets have repriced accordingly, with notable dovish adjustments in the priced-in policy path for the ECB and the BOE playing since each central bank’s last meeting.

The key consideration now is whether either of them is prepared to push back. Inflation expectations priced into the bond market – so-called “breakeven rates” – fell in October and November even as more rate cuts were being priced in. This means the ECB and BOE need not turn the screws on investors. That may hurt the euro and the British pound.

S&P global composite PMI: Eurozone, UK
Source: Bloomberg

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak 

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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