Week Ahead: Fed to Outline Path for Rate Hikes in 2018

Week Ahead: Fed to Outline Path for Rate Hikes in 2018

Written by: Phil Evans

Central banks are the focus this week with the Federal Reserve, European Central Bank and the Bank of England all in action. With the ECB and BoE expected to stand pat, the Fed is the star attraction as it is anticipated to raise rates again and release fresh forecasts for hikes in 2018 and beyond.

Federal Reserve

The Federal Open Market Committee (FOMC) is all but certain to raise interest rates again on Wednesday, with markets pricing in a roughly 90% chance that the target federal funds rate will be increased by a further 25 basis points.

The focus for market participants is therefore on the updated economic projections and the so-called dot plot, which sets out how policymakers see the likely path of interest rates.

With tax reform now firmly on the agenda, it is anticipated that policymakers may raise their forecasts. This could see the median fed funds rate projection for 2018 pushed up from 2.1% to 2.3%, or even 2.5%, suggesting a higher likelihood the Fed will hike 4 times next year. Markets are currently only pricing in slightly better than evens chance of 3 hikes in 2018. The 2019 median estimate could rise from the current 2.7% to as much as 3%, or more.

Markets will be looking for any definite signal that the Fed is turning more hawkish following the progress on tax reform. In September when the most recent dot plots were published, officials had yet to price in fiscal stimulus into their forecasts. Tax reform could force the Fed to rethink its longer run projections for interest rates, implying more elevated terminal rate in future than is currently forecast, which be support longer-dated bond yields and ease concerns that the Fed might be hiking short term rates too quickly.

The FOMC statement and dot plot are released at 19:00 (GMT) on Wednesday. A press conference with chair Janet Yellen follows at 19:30.

ECB

Nothing to see here: the ECB is expected to confirm its monetary policy stance on Thursday with no change to the outlook. After setting out its very gradual pace of tapering at its last meeting, it seems the ECB is happy to go quiet for a while. Sources have told Reuters that policymakers are happy to put any debate about rate hikes on ice for a few months.

QE will continue at a monthly pace of €30 billion until the end of September 2018, although there will be no abrupt end to the programme in October. With this in mind any discussions about the next phase of the taper do not need to be addressed yet, while interest rates are not expected to rise until well into 2019.

Nevertheless, Mario Draghi will likely have to fend off criticism that with growth in the Eurozone cranking higher monetary policy remains too accommodative. A persistent lack of any improvement in the core inflation remains his best defence.

The ECB’s main policy rates are published at 12:45 (GMT) on Thursday, with the usual Mario Draghi press conference to follow at 13:30.

Bank of England

Like the ECB, the BoE is expected to leave its main interest rate on hold at 0.5% following the 25 basis point hike last month. Although the Monetary Policy Committee raised rates, there was sufficient dissent among voting members and dovish language in the accompanying statement to quash speculation the Bank is embarking on a tightening cycle. Talks of more rate hikes will remain on ice until later in 2018.

The MPC decision is due at 12:00 (GMT) on Thursday.

US Inflation & Retail Sales

On the data front, the big releases for the dollar include the CPI inflation and retail sales numbers for November. Although the data is unlikely to play a part in the FOMC decision this month, it nevertheless will help guide markets as to the robustness of the US consumer and usually exerts an effect on USD trades when released.

The most important reading is the core CPI number, which measures inflation excluding volatile categories such as food and energy. This ticked up to 0.2% from September to October, taking the annual rate of core inflation to 1.8% and easing concerns that persistently low underlying inflation pressures were more than temporary.

Dixons Carphone Interims

Shares in Dixons Carphone plunged in August after the company warned that profits this year would be materially lower than forecast. It said headline profits before tax would be £360m-£440m, or around 20% down on last year at the mid-point.

In particular, management are concerned that customers are not updating their mobile phones often enough. But a significant portion of the expected fall in profits is down to changes in EU roaming charges. This year Dixons said one-off adjustments in relation to this would be £10m-£40m, against a positive contribution of £71m last year.

The interim results will provide a clearer picture of where the retailer stands and will include early visibility on sales of the iPhone X as well as the company’s Black Friday performance.

Source: ETX Capital