Of the forces driving prices in the week ahead, events appear more important than economic reports. There are four such events that investors must navigate. The Bank of Canada and the European Central Bank meet. The UK High Court will deliver its ruling on the role of Parliament in Brexit. The rating agency DBRS updates its credit rating for Portugal.
The Bank of Canada is not going to change interest rates. Still, growth has disappointed, and price pressures appear to be ebbing. It will take longer than the BoC is currently anticipating to close the output gap. It may adjust its forecasts accordingly. In addition, the recent use of macro-prudential policies to address housing market activity eases one of the inhibitions for a rate cut. The market is currently pricing in about a one in 20 chance of this materializing next year.
The risk may be somewhat greater than that In part, there seems to be too much made of the trade-off between the fiscal stimulus and monetary easing. It is so pre-crisis. This week’s data is likely to show that CPI continues to moderate and, despite the launch of a new low-income family benefits program, retail sales like fell in August, and the risk is on the downside of the median forecast of -0.1%.
It does not appear that the ECB is prepared to announce a decision about whether it will extend its asset purchases after the current soft end date of March 2017, or about how it will address the potential scarcity of particular securities. Although we thought there was an opportunity to do so last month, it now seems more likely that the ECB will make its decision at the December meeting.
In addition to giving it more time see the impact of its current policy setting, it will also have new staff forecasts, which Draghi seems to prefer. The updated forecasts are helpful in stealing some thunder from his critics that often make it sound as if Draghi’s commitment stems from his national origin rather than “objective” economic analysis.