Week Ahead: Is it Time for the Fed to Start Talking about Tapering?

After the BOC and the ECB gave markets little new information on their bond purchase programs at their respective interest rate decision meetings last week, the FOMC will take a look at it this week. With higher inflation and weaker-than-expected jobs, will the Fed start talking about a decline? There are also several other central bank meetings this week. In the UK, an increase in the number of new cases of coronavirus due to variants may cause them to postpone their full reopening date. In addition, the UK and Australia are both releasing job data this week. Will the data be better than expected or will they fall short, as will US and Canadian job data? We will also get sales and inflation data from U.S. May this week. Are we going through the transition period?

BOC and ECB

Both the Bank of Canada and the European Central Bank met last week and left rates unchanged, as expected. In addition, they each left their respective bond-buying programs. Considering that the BOC has already started to reduce its bond purchases, many now feel that they will decline again when the central bank meets in July. However, those hoping for a signal when the ECB is ready to reduce bond purchases have been left with the same questions. The phrase “significantly higher rate” of bond exchange remained in the statement and Christine Lagarde said in the press conference that it is “premature” and “too early” to start discussing declining bond purchases.

FOMC

Although the Fed is not expecting higher interest rates at this meeting, traders are wondering if the FOMC will be willing to start discussing declining bond purchases from current levels of $ 120 billion a month. If so, Jerome Powell and a band will have to lean around their tongue so as not to cause “declining anger,” in which stock exchanges sell positions in the face of the easing of quantitative easing. Since the last FOMC meeting, inflation has been higher than expected, with the most recent headline CPI at 5% Yo! In addition, the FOMC has been given 2 months worse than expected Non-Farm Wage Data and there are still about 7.4 million people who did not return to jobs before the pandemic. The Fed has indicated they want to see a chain of months of actual employment data on track for a lasting recovery before they begin to decline. They also said they will let inflation warm up as the labor market returns to pre-pandemic levels. Will the recent employment data, not to mention the high inflation data, be enough for the Fed to start talking about a decline? That’s the big question traders will be looking to answer at the FOMC when they meet this week.

More Central Banks

In addition to the FOMC meeting this week, BOJ, SNB, Norges Bank, and Central Bank of Turkey are also meeting. The most notable meeting will be from Norwegian Norges Bank, which was late in the day. However, recent poor inflation data may cause members to soften their statement as they wait for more clarity before signaling that they intend to raise rates.

Will the UK fully reopen on 21 June^st?

According to the reopening roadmap for the UK, all economic and social restrictions will be lifted on 21 June^st. However the new delta variant has caused an increase in new cases and is said to be more contagious than the original virus. Officials in the UK are considering pushing back the final stage of the reopening of 2 to 4 weeks to allow more people to receive vaccinations. Decision on whether to end final restrictions on June 21st^st is expected on Monday. More than 50% of the UK is currently vaccinated.

Economic Data

The economic calendar is packed this week! In addition to the central bank meetings this week, both the UK and Australia will release employment data that could be useful to traders looking for signals on when their respective central banks will start to decline. In addition the US and UK will release May Retail Sales, China on Wednesday will have a “data base”, and inflation data will be released by several countries throughout the week! The most important data releases this week are the following:

Monday

• New Zealand: Services NZ PSI (MAY)
• Japan: Final Industrial Production (APR)
• UK: BOE County Bailey Speech
• EU: Industrial Production (APR)
• Canada: Final Production Sales (APR)

Tuesday

• Australia: RBA Meeting Minutes
• Australia: House Price Index (T1)
• Germany: Inflation Tax End (MAY)
• United Kingdom: Change of Questioner Earl (MAY)
• EU: Trade Balance (APR)
• Canada: Accommodation Begins (MAY)
• Canada: PPI (MAY)
• United States: Retail Sales (MAY)
• United States: PPI (MAY)
• United States: NY Empire State Manufacturing (JUN)
• United States: Industrial Production (MAY)
• United States: Manufacturing Production (MAY)
• United States: NAHB Housing Index (JUN)

Wednesday

• New Zealand: Westpac Consumer Trust (Q2)
• Japan: Trade Balance (MAY)
• Japan: Machine Orders (APR)
• China: Industrial Production (MAY)
• China: Retail Sales (MAY)
• China: Unemployment Rate (MAY)
• UK: Inflation data (MAY)
• Canada: Inflation index (MAY)
• United States: Housing Begins (MAY)
• United States: Building Permits (MAY)
• United States: Fed Interest Rate Decision
• Raw Stocks

Thursday

• New Zealand: GCP Growth Rate (Q1)
• Australia: RBA Gov. Lowe Speaks
• Japan: Reuters Tankan Index (JUN)
• Australia: Employment Change (MAY)
• China: House Price Index (MAY)
• EU: Inflation Tax End (MAY)
• Turkey: Interest Rate Decision of TCMB
• United States: Philadelphia Manufacturing Index (JUN)

Friday

• Japan: Inflation Index (MAY)
• Japan: Interest Rate Decision of BOJ
• Germany: PPI (MAY)
• UK: Retail Sales (MAY)
• Canada: New Index Price Index (MAY)

Income

There isn’t much discussion about the revenue ahead of this week (and the next few weeks) as we approach the end of the quarter. Some of the more notable revenues are as follows: TED, ORCL, AHT, BOO, BWY, LRN, HFD, HLMA, HOME, KR, ADBE

Diagram of the Week: US 10-Year Yields

Source: Tradingview, FOREX.com

U.S. 10-year yields have been lower since the NFP data last Friday. After stepping back by about 50% from pandemic highs to pandemic lows on March 31^st at 1,774, yields began to lean lower again. However, after the NFP data was released, the yields started aggressively lower. The 4 of June^th, Yields formed a bearish swallowing pattern and moved from 1.635 down to Friday’s low of 1.428, just below the January 4 38.2% Fibonacci level^th low until March 31st^st maximums. If yields continue to be lower, horizontal support is at 1.372, just ahead of the 50% retracement level at 1.34. Psychological round number resistance above is at 1.50. The 4 of June^th highs provide the next resistance level at 1,635, just ahead of the March 31 downward trend^st highs close to 1,665. Note that traders may buy bonds ahead of the FOMC meeting this week, which increases returns as they await the statement and outcome of a press release.

Since the BOC and the ECB were unchanged last week, we are seeking guidance from the FOMC and other central banks this week. Markets may calm down until the meeting on Wednesday, but if there is any hint of a time of decline, watch out for yields to rise even with the possibility of a declining tantrum!

Have a great weekend!