Jobs, China and the ECB

If we had a crystal ball for this week it would probably say something along the lines of ‘proceed with caution, volatility ahead’. In a week of top tier economic data from both sides of the Atlantic, market participants will be watching US jobs data for November in what could present the final argument in favour of the Fed lifting interest rates…or not. In terms of market reaction it not about the result, it’s about expectations and its clear most are expecting the jobs data to add credence to a December rate hike. If it doesn’t, volatility will ensue and the US dollar will likely suffer the consequences. Before the main event, markets will be watching for other top tier data points with ISM manufacturing (Wednesday), Beige book and ADP employment data (Thursday) and ISM Services on Friday. Perhaps the key determinant for the greenback ahead of Friday’s NFP’s will be two speeches by Fed Chair, Janet Yellen.

Meanwhile, it’s just as exciting across the Atlantic with the much anticipated European Central Bank decision on Thursday. It’s a very different thematic for the Europeans who are debating the need to adopt further accommodative policy stance in the form of lower (negative) deposit rates. Banks currently pay -0.2% to park their funds overnight, and it’s expected that will be lowered to -0.3% on Thursday.  The theory is the more it costs for financial institutions to park their money with the ECB, the less inclined they are to do so. The ECB are expected to keep interest rates at 0.05%.

Ahead of the meeting, the focus will be on the release of European consumer price index (CPI) on Wednesday. This is expected to show the ECB have more than enough spare capacity to increase stimulus with annual inflation expected to come in at 1.1% – well below the ECB’s target rate of less than 2%. In the lead up, on Tuesday German CPI and Unemployment data will be the key focus and seen as a precursor to the data releases later in the week.

On the domestic front, the first Tuesday of the month is always exciting for local rates pundits, with the RBA expected to ‘chill’ on rates and keep them at a record low 2%.

As noted in last week’s report, RBA Governor, Glenn Stevens’s poured cold water on the chance of a near-term rate cut. He was unusually ‘chilled’ in any case when responding to a question about prospects of interest rates being cut further, saying “we’ve got Christmas. We should just chill out, come back and see what the data says.” In a clear sign that that we won’t see another rate cut this year, Stevens further said he agreed with the argument that rates should remain at 2% when the bank meets in December.

Perhaps it is way of trying to subtly express some confidence. Over the years Stevens has expressed the importance on focusing on the positives, with negative views often leading to negative outcomes in ‘self-fulfilling prophecy’ type fashion.

Long Aussie traders need to see the same relaxed commentary from the Reserve Bank that we’ve seen in recent times from Governor Stevens. But it’s likely to be quickly forgotten on Wednesday when the growth turns to the release of third quarter GDP and market participants turn to what the bank will do in February 2016. Early expectations are for GDP growth of 0.7% (QoQ) and 2.3% (YoY).

While tomorrow’s rates decision is unlikely to be a major market moving theme, by default, the Aussie’s likely to be dragged along with USD volatility throughout the week as participants respond to economic data points, speeches and general conjecture in the lead up to NFP’s. China manufacturing data out tomorrow also has form of being a key determinate for the local unit.