Week Ahead – ECB to hold meeting following key Eurozone elections

The ECB’s last meeting of 2016 will probably be the main event of the week ahead, although the markets will first have to grapple with the results of the weekend elections in Austria and the outcome of the Italian referendum (both on Sunday). Other key events next week will include the Reserve Bank of Australia rate-setting meeting as well as GDP data for the country. It will be comparatively quiet in terms of major US data, with exception of Factory orders, ISM non-manufacturing and a key speech by the New York Fed President.

All eyes on Eurozone political risk and Draghi’s response

The start of trading on Monday is expected to be an exciting one for euro traders as the results of both the Italian referendum and the Austrian elections are set to come out. Italy’s Prime Minister has wagered that the country will likely back his constitutional reforms rather than risk a crisis, but Matteo Renzi looks set to lose that bet. An Italian ‘no’ vote will not result in any immediate danger, but it could be a warning to investors that they should take populist forces in the Eurozone more seriously. Investors have already partly priced in some sort of negative political outcome in Italy by nearly doubling the country’s 10-year government funding cost in the past 4 months.

As there will be a number of key elections in the Eurozone next year such as France, the Netherlands and Germany, signs that populist forces are gaining the upper hand could spook investors. This could add to the problems of the European Central Bank, which is using its asset purchase program to lower the funding costs of governments around the Eurozone. The ECB will meet on Thursday and it could decide to announce an extension to its QE program beyond March of next year. Given the rise in certain peripheral yields lately as well as inflation remaining well-contained (it rose to only 0.6% year-on-year during November), an extension of QE would probably be the most prudent decision for the European Central Bank to make.

Reserve Bank of Australia to hold rates

The RBA is expected to keep interest rates at the record low of 1.5% when it meets on Tuesday, despite some mixed data on the country’s fixed investment and construction sector released recently. The chances of a rate cut next year are seen receding as well, as the economy appears to be doing a little better-than-expected overall. Commodity prices such as copper have gained strongly over the past month and a half, whereas the Australian dollar has generally stayed below 0.75 versus the greenback. News out of China have also been comforting. The statement by Governor Philip Lowe should help the market better understand the RBA’s approach under its new leadership.

In terms of economic data, the third quarter GDP numbers should show that economic growth slowed down a little bit during the third quarter. Quarter-on-quarter Australia is expected to have grown by 0.3%, while it had expanded by 0.5% during the second quarter. Its annual growth rate should come in around 2.5%, which is relatively high for a developed economy.

US week to feature little major data but important Fedspeak

The United States economic calendar will feature some interesting releases next week but nothing as important as the recently published employment report for November. Among other indicators, factory orders, ISM non-manufacturing, international trade, labor costs and productivity and Job openings will attract some attention. The week will finish with the release of the preliminary University of Michigan consumer sentiment for December.

One of the most important events next week will be a speech by Federal Reserve of New York President William Dudley on the macroeconomic outlook. This speech will take place on Monday in New York and it will be followed by speeches from regional Fed Presidents Evans and Bullard. The three speeches, right before the ‘blackout period’ for Fed Board members’ public comments, will present a golden opportunity for the Federal Reserve to prepare the markets prior to the policy announcement of the December 13-14th meeting. This will mean added focus on the three Fed speakers – particularly Dudley who is a permanent voting member as New York Fed chief.