*Please note; The author is working from UTC +13 when determining the timeline of data releases.
Factory Orders from Germany for the Month of October is the first significant piece of data for the week. The market is expecting a 0.5% decline MoM, in factory orders. The EUR may come under pressure when this data reaches the market, especially when investors consider it in tandem with a recent German IFO Business Survey, indicating diminishing business confidence in the region and further noted “Supply chain bottlenecks are putting companies under real pressure, there is no sign of a let-up.”
Possibly adding to downward EUR pressure is the German ZEW Economic Sentiment Index DEC, due Tuesday. The index measures the level of optimism held by analysts concerning economic developments stretching out over the next six months. The ZEW index is anticipated to post a decline of ~5 points to 25.3, from November’s reading of 31.7.
The Bank of Canada’s (BoC) Interest Rate Decision and Rate Statement are released very early Thursday. It will be interesting to see if the BoC will action its bullish rhetoric sooner than next year. However, with oil prices currently under pressure, a hike by the Bank is looking unlikely before April. Importantly, Deputy Governor of the BoC, Toni Gravelle, will speak to the organisation’s Economic Progress Report the following day.
China’s Consumer Price Index (CPI) YoY data to November is due early Thursday afternoon. Last month, China’s CPI accelerated sharply from 0.7% to 1.5% as producers passed on rising costs. Producer costs have risen 13.5% since October 2020, the fastest pace in 26 years. As such, analysts are again expecting a steeper incline for November CPI data. Market forecasts have China CPI hitting 2.5%.
Mexican Inflation Rate data YoY to November will be posted just after the clock ticks over to Friday. Mexican inflation is anticipated to record its fourth month of increases and possibly pass the 7.00% threshold. The Central Bank of Mexico, while believing inflation to be transitory, might respond with another rate hike when it convenes the following week to dampen inflation expectations leading to persistent inflation. The Mexican Peso spent much of last week strengthening against the USD, so the market may have priced this in already.
The US gets the last word this week. Its Inflation Rate YoY to November is anticipated to follow Mexico’s, creeping up to ~7.00%, from 6.2% the previous month. This forecast proving true could strengthen the Federal Reserve’s resolve to speed up its bond-buying taper and possible move forward the schedule of interest rate hikes.
After tanking many equities at the end of last week, the new coronavirus variant out of South Africa will likely be of primary interest to investors leading to the end of 2021. Nonetheless, the show must go on, and several vital data reports from the world’s major players are released this week.
*Please note; The author is working from UTC +13 when determining the timeline of data releases.
Freshly re-elected Federal Reserve Chair Jerome Powell is scheduled to speak (pre-recorded) on Tuesday morning. However, Powell won’t touch on US inflation, interest rates, and bond-buying issues. Investors might glean more critical information from the speeches of Fed representatives Richard Clarida (Vice-Chair), John Williams, and Michelle Bowman, who all speak Tuesday morning.
The Europeans Union’s Inflation Rate YoY for November is released Tuesday night. A rise from 4.1% the previous month to 4.5% is expected. Even so, It would be a shock for the European Central Bank to pull away from its ultra-accommodative stance in reaction.
We are graced with another Fed Chair speech on Wednesday. This speech should be more closely watched than Tuesday’s.
Powell will testify before the US senate in a speech tilted Coronavirus and CARES Act. It will be interesting to see if Powell’s tone on the transitory nature of inflation has changed to match that of US Treasury Secretary Janet Yellen.
Closing the week will be employment data from the US. First up is the US ADP Employment Change for November. ADP employment is forecast to rise by more than 500K, marking a third straight month of such rises if actualised.
The November Unemployment Rate and Non-Farm Payroll (NFP) are released early Saturday morning. A value in the Mid-500K is expected for NFP, while Unemployment is expected to fall one percentage point to 4.5%.
With employment being a more significant factor for the Fed under Powell’s tenure than previous Chairs, a solid report should help strengthen investors current understanding of the Feds position and timeline on rate hikes and tapering.
You might think that the economic news might be slowing down this week after the week we have just had. Alas, that is not so; this week's forex market might be just as choppy with some critically important reports emanating from Japan, China, Europe, and the UK, in particular.
Due on Wednesday, US Retail Sales growth for October is anticipated to increase by 0.7%, the same as September's Retail Sales growth. However, with supply constraints potentially inspiring people to complete some Xmas shopping early, a surprise beat might be on the cards for this report.
Back over the Atlantic, the UK releases its CPI data for October. The YoY CPI for the UK currently stands at 3.1%, after edging down from 3.2% in September. Septembers CPI dip might be temporary, and several factors indicate that CPI could rise with Octobers data. Chief among them is the flow-on effect expected from the UK factory gate prices rise to 6.7% in September, from 6.0% in August.
On Thursday, it is Canada's turn to release CPI data. After Septembers data, Canada's inflation rate was running at an 18-year high of 4.4%. Market consensus is pointing toward a fifth straight increase in the CPI, to 4.6%, while TradingEconomics predicts an even more significant leap to 4.9%.
We end the week with Japan noting its CPI data for October. Sustainable price growth in Japanese consumer prices is in doubt moving forward. Last month, CPI hit 0.2%, after remaining below 0.0% since the latter half of 2020. However, Japanese businesses are largely absorbing the rise in their input costs, whether temporary or permanent, rather than passing them onto consumers.
With its back up against a wall, the US Federal Reserve has pledged to begin tapering its asset purchase program. Beginning later this month, the Federal Reserve will taper the number of US Treasury Securities it purchases each month by US $10 billion and the number of Mortgage-Backed Securities by US $5 billion.
By all accounts, a dreaded ‘taper tantrum’ has been avoided in the wake of the announcement. At least in relation to the forex market. Federal Reserve chairman Jerome Powell has been extremely careful to prime investors for this moment. For one, all hawkish commentary from the chairman has been mediated with dovish caveats. Admittedly, less senior Federal Reserve officials have done much of the leg work in hinting and out-right suggesting the need for a reduction in its purchases. Either way, the conversation surrounding tapering has been sustained for months, giving investors time to mull over the implications.
As of writing, the USD index, the DXY has crossed back over the 94.00 mark and comfortable sits 94.33, up 0.53% since the Federal Reserve’s tapering announcement.
The Federal Reserve will still be purchasing $105 billion worth of securities, with further reductions dependent on continuing favourable economic outlook. The Federal Reserve has indicated it is considering reducing spending, month over month, moving forward. However, if economic conditions deteriorate, the spending reductions could be nullified or reversed. The Federal Reserve will be keeping an eye on inflation and the number of jobs added to the economy each month.
A significant consideration of the Federal Reserve when determining its reduction in spending is the US inflation rate. While it is at a 13-year high, the Federal Reserve maintains that most of the inflation experienced heretofore is temporary.
Octobers inflation number is released next Wednesday. Trading Economics is forecasting a 0.1% increase in US inflation.
Another significant consideration of the Federal Reserve when determining its tapering is the Non-Farm Payroll (NFP). The NFP indicates how many non-farm jobs were added to the economy in a given month. The data for the October non-farm payroll will be released tonight to great anticipation. Trading Economics is forecasting 400K jobs, while the market consensus is a little more optimistic and is forecasting 450K jobs.
The NFP has disappointed for the past two months, with actual job figures falling far short of the numbers predicted. Even so, the Federal Reserve has seen fit to begin tapering as job growth seemingly slows. Treasury Security Janet Yellen noted the US economy is still short 5 million jobs compared to pre-pandemic times, which will take the US years to recover at the current rate of job growth.
Europe is home to some of the largest companies in the world, with market capitalisations in the hundreds of billions of dollars. However, these large European companies are not as well-known as they could be by investors outside of the Eurozone. Sexier, fast-growing US and Chinese tech stocks will generally hog media headlines and investor portfolios, shoehorning European stocks into investor blind spots. Yet, as Kiplinger has recently pointed out, overlooked markets, such as Europe, are ripe for investment opportunities.
Even the largest, most attractive companies in the Eurozone are relatively cheap compared to their US counterparts. Comparing the average Price/Earnings (P/E) ratios of European companies to US and Chinese companies can help demonstrate this assertion.
Stock Exchange: Euronext Paris
Market Cap: 396.2 billion USD
P/E ratio: 34.95
Comparison: Nike (NYSE: NKE), Market Cap: 264.8 billion USD, P/E ratio: 45.07
LVMH, short for Louis Vuitton Moët Hennessy, is Europe's largest stock. Headquartered in France, the Company has built and acquired a portfolio of more than 70 luxury brands over thirty years. It's safe to say that many of its brands are household names in Europe and worldwide. In addition to its namesake, LVHM also owns Sephora, Dior, Bulgari, and Tiffany and Co., helping the Company generate 44.2 billion euros in 2021 YTD.
The dynamism of LVMH's portfolio is the reason for the Company's positive outlook. LVMH expects to strengthen its market-share moving forward, just as it has done over the past couple of years. For the first nine months of 2021, the Group has recorded organic revenue growth of 11% compared to the corresponding period in 2019.
Stock Exchange: SIX Swiss Exchange
Market Cap: 362.8 billion USD
P/E ratio: 27.70
Comparison: Kweichow Moutai (SHA: 600519), Market Cap: 358.9 billion USD , P/E ratio: 45.75
The Swiss conglomerate is the Eurozone's second-largest Company and the largest food company in the world. Nestlé owns more than 2000 brands, including Fast-moving consumer goods (KitKat, Smarties, Häagen-Dazs, Mövenpick, Lean Cuisine, Maggi, Hot Pockets), supplements (Boost), pet-care (Purina, Friskies, Fancy Feast), and baby foods (Gerber, Ceralac).
Producing Fast-moving consumer goods exposes Nestlé to the risk inherent in the current bout of inflation currently occurring in the Eurozone. However, the Company is confident that its margins are padded and are expecting organic growth across the whole business to lift by 6% to 7% in 2021.
Stock Exchange: Euronext Amsterdam
Market Cap: 336.0 billion USD
P/E ratio: 51.57
Comparison: Cisco Systems (NASDAQ: CSCO), Market Cap: 236.1 billion USD , P/E ratio: 22.39
ASML is a Netherlands-based manufacturer servicing the semiconductor industry, supplying equipment and software to the likes of Taiwan Semiconductor Manufacturing (NYSE: TSM), Intel (NASDAQ: INTC), and Samsung Electronics (KRX: 005930).
At the start of 2019, ASML's P/E ratio was under 22.0. In two years, its P/E has more than doubled as the semiconductor industry, and its peripheries became a favourite of investors. In this way, ASML doesn't conform to the lower P/E comparison that the rest of this list does.
What ASML does have in its favour is almost complete domination of its industry. ASML is estimated to control 90% of the market for Semiconductor equipment and software. While ASML isn't predicting a lift in market share in the medium term moving forward, its main clients are expected to lift their investment in production lines significantly.
Stock Exchange: SIX Swiss Exchange
Market Cap: 335.5 billion USD
P/E ratio: 21.60
Comparison: Johnson & Johnson (NYSE: JNJ), Market Cap: 428.8 billion USD , P/E ratio: 24.49
Roche, another Swiss conglomerate, is Europe's largest healthcare company, generating 46.7 billion CHF in revenue in 2021 YTD.
Roche is at a critical juncture, as patent protection lapses for many of its legacy drugs. Herceptin, Avastin and Rituxan, which used to generate one-third of the Company's revenue, are all sliding in sales as off-patent brands hit the market.
However, several new drugs from the Company are hoped to bolster growth prospects moving forward. Drug development and approval are typically glacially slow. Yet, in one 2021 case, Roche has been approved fast-track approval by the US Food and Drug Administration for an Alzheimer's drug.
Stock Exchange: Euronext Paris
Market Cap: 257.0 billion USD
P/E ratio: 35.84
Comparison: Revlon (NYSE: REV), Market Cap: 550 million USD , P/E ratio: 38.87
L'Oréal is a French cosmetics, beauty, and consumer goods Company and the second-largest stock on Euronext Paris. A household name itself, L'Oréal, also owns Maybelline, Lancôme, and Garnier, among a handful of other brands. The cosmetics giant projected a "roaring 20s" in respect to 2021 revenue and has not disappointed YTD. Sales over the entire Group for 2021 are up by more than 18.0%.
Moving forward, the outlook for L'Oréal is potentially just as rosy, with the Group set to benefit from an uptick in demand from China consumers, as well as customers preferring a higher-margin direct-to-consumer (DTC) experience. L'Oréal has noted that DTC will account for 50% of its sales in the future. However, it hasn't set a timeline to achieve this milestone.
As of writing, the DXY (USD index) is trading at 93.35, down by 0.50% on Thursday trading.
GDP growth in the US may be contributing to this 4-week low in the dollar index. GDP growth missed expectations for Q3 2021, reporting in at 2.0% rather than the expected 2.7%. Q3’s GDP growth represents the lowest value reported for this data point since the US began to recover from the worst of the pandemic.
Supply constraints have been pointed out as one of the major causes for the GDP growth miss, as reported by Fannie Mae earlier in the month. Fannie Mae expects the constraints to continue for another 12 months, although weakening in intensity as time passes.
The USD has lost the most ground against the EUR in the past 24 hours. EURUSD is trading at 1.16831 at the time of writing, up by 0.72% and a one month high for the pair. The cause of the EUR's strength: The public address by the Christine Lagarde, head of the European Central Bank (ECB), playing down any fears of inflation.
While Inflation in the Eurozone is at a 13-year high (3.4%), Lagarde and her ECB associates are not ready to drop the notion that inflation is transitory. The ECB want to see inflation above 2% over the medium term before considering rate hikes or taking a more hawkish tone.
The ECB believes that inflation in the Eurozone has been driven chiefly by supply bottlenecks and energy prices. It could be some time before investors see any change in the dovish stance of the ECB.
Supply constraints are expected to last for a great deal of time, as noted above, while energy prices are yet to show any sign of abatement. The Biden administration has asked energy producers to lift production to help drop the cost of energy. But the request is falling on deaf ears.
At the time of writing, WTI is trading at US $83.04 per barrel, while Brent is trading at US $84.39 per barrel. Both Oil instruments are trading at multi-year highs. The price of Natural Gas does swing widely day-to-day. A 7% swing either way over a day’s trading is not uncommon. Yet, Natural Gas is still trading at US $5.732/MMBtu, more than double the price at the beginning of 2021.
Inflation data from outside the US should pique traders interest this week. Several major economies will be reporting on actual inflation figures experienced during September 2021.
Will they match their forecasted values, or will the data follow US inflation and surprisingly creep upward?
Traders of the Great British Pound, South African Rand, Euro, Canadian Dollar, and the Japanese Yen should circle these dates in their economic calendars.
While inflation data is usually closely watched, the surprising inflation figures released in the US last week means traders should be extra vigilant with their inflation watching.
Last week, the US inflation rate (September, YoY) surprised the market by beating expectations. Inflation in the US was expected to report at 5.3%, level with the rate reported in August. However, the actual figure arrived ten basis points higher (5.4%) and returned inflation to the 13-year high seen a month earlier in July 2021.
As it stands, Trading Economics is forecasting inflation in the US inflation rate (October, YoY) to rise another ten basis points to 5.5%. If inflation were to cross 5.6%, a new 30-year record would stand (US inflation Jan, YoY, 1991 was 5.7%).
Wednesday, 7:00 pm (NZDT)
What is the forecast for Sep: 3.2%
Wednesday, 9:00 pm (NZDT)
What is the forecast for Sep: 4.9%
Wednesday, 10:00 pm (NZDT)
What is the forecast for Sep: 3.0%
Thursday, 1:30 am (NZDT)
What is the forecast for Sep: 4.1%
Friday, 12:30 pm (NZDT)
What is the forecast for Sep: -0.4%
Inflation is on everyone’s mind. Not a day goes by without Blomberg Television asking me, on one of the offices 43-inch screens right in my line of sight, if inflation across the major economies, seen thus far, is:
Inflation is not globally homogeneous, of course. Rather, it presents differently in different countries. So, with this in mind, let's review some inflation data from the major economies around the world. It will be prudent to examine the tone that the respective Central Banks around the world are projecting.
Inflation in the US hit 5.4% as of June 2021, its highest value in thirteen years. 5.4% may seem impressive, but don't be fooled. Accounting for the majority of inflation are massive increases in the price of vehicles (new, but mainly used) and fuel (both up ~45% since last year), as supply constraints affect car makers globally and fuel recovers from abnormally low prices in 2020. It is almost unfair to compare fuel prices of this year to that of last year.
Moving forward, now that fuel prices are stabilsed (somewhat), a question we can ask ourselves is how long the inflation of car prices is likely to last and what hurdles may still exist that are hampering these production lines?
Knowing the primary catalyst of inflation is vehicles and fuel, The Fed position on inflation appears rational.
The narrative from the US Federal Reserve is that the current bout of inflation is Transitory. As in, it is not likely to stick around for too long. Fed Chair Jerome Powell has had to reiterate that this is The Fed's position repeatedly during his public appearances.
Powell has done a good job in quelling hawkish sentiment for the most part. Albeit, an unavoidably hawkish announcement from The Fed came in June when it bought forward its estimate for when the next few rate hikes could occur. This announcement was taken as Hawkish because it contrasted so much with the typical messages coming from The Fed. After all, the rate hikes are still anticipated to be more than a year away.
Central Banks around the world are generally echoing the sentiment of The Fed. In that, they are playing it relatively safe and trying to avoid prematurely pulling stimulus or pulling back too aggressively.
However, ultimately, the tone from the other Central Banks are a touch more hawkish than The Fed. For example, the Bank of Canada (BoC) and the Bank of England (BoE) have already begun slowing their bond-buying programs by billions each week.
The Hawkish nature of the BOC and BoE is interesting because Canada and the UK are dealing with considerably lower inflation values. Speculatively, a few reasons for their respective tone might be:
- The BoE and BoC are viewing the current bout of inflation as permanent.
- The BoE and BoC are less confident in their ability to control an unwanted level of inflation.
- Or simply, global markets are far more sensitive to announcements coming out of The Fed, and thus an extra-conservative tone must be taken by Powell and Co. Comparatively, the tones of other Central Banks are then taken as Hawkish.
Oil hitting one hundred dollars per barrel sometime in the next six months is the bullish sentiment held by many financial institutions.
Analysts expect that Oil producers will not be capable of ramping up supply in time to meet an anticipated surge in demand. Increasing supply is not a simple undertaking. It generally takes weeks or months of investment to ensure the infrastructure is in place to manage the change in supply.
The lift in demand is supposed to be driven by economies further relaxing travel and commerce restrictions in line with the rollout of their respective vaccine programs.
The shortage of supply in the face of surging demand will then push the Oil price up another USD 30 per barrel. WTI and Brent are currently in-between USD 72 and 75 per barrel, with a general momentum to the upside. The upside momentum is in line with the general optimism swirling around global markets since the world's major economies, particularly the US and the United Kingdom, reported the immense success they were having in vaccinating their populations.
The major event that can derail the bullish predictions for Oil is, of course, Covid. In particular, the Delta variant spreading further afield.
The drop in price that Oil experienced over Monday trading (28/06/20201) perfectly Illustrates the power of the delta variant to affect Oil prices
The price drop followed new lockdown measures in South Africa, Australia, New Zealand, and Malaysia. Throughout Monday trading, WTI fell by 1.5%, and Brent fell by 1.9%
To make matters worse for the bullish predictions for the Oil price is the upcoming OPEC meeting on July 1st. The Oil-producing nations might agree to lift the number of barrels they supply.
The last time OPEC met, they were drinking the positive-optimism cool-aid being served at that time. But, in doing so, they knowingly dismissed the lacklustre data coming from the US and Eurozone and the worsening situation in India and Japan.
However, OPEC noted that they had not ruled out a negative outlook for the rest of the year in their last meeting. Therefore, we could expect a different tone from the group in the forthcoming meeting.
Suppose OPEC continues to believe that the global economies are on their way to recovery. In that case, they might continue on their plan to lift supply, and a bullish prediction extending to $100 per barrel begins to look less likely.
The markets are (possibly) set to be as choppy this week as much as they were last week. The choppiness could materialise in the Forex market as two major Central Banks of the world take the spotlight. On Tuesday, the US Central Bank will be evaluating their response to the pandemic before members of the Senate panel on Covid aid. On Wednesday, the BoE will update the market as to its evaluation of the British economy and its monetary policy.
In his first outing since lasts week's FOMC, Fed Chair Jerome Powell will (virtually) head to Capitol Hill to address Washington politicians on Tuesday. The topic of discussion will centre on "lessons learned" regarding the Feds response to the global pandemic and its economic consequences.
Investors are currently trying to parse fact from fiction regarding what they hear from the Fed and what the market reports. Of particular concern are contradictions between the Fed's outlook for inflation, the Fed's massive money printing regime, and the rise and subsequent fall in commodity prices.
Last week's FOMC only served to increase interest in Powell's public appearances. Last week's FOMC was notable for the Fed's change in 2021 inflation projections, as well as expected long-term inflationary pressure. For example, the Fed's 2021 inflation projections rose from 2.4% to 3.4%, while it now expects two interest rate hikes by the end of 2023.
A brief reprieve is granted the USD until Thursday when we can expect to see May Orders for Durable Goods, GDP annualised (Q1), as well as the Bank Stress Test report from the Federal Reserve System.
It will be interesting to see if the USD's bullish turn last week will continue when the markets open this Monday. Further, I wonder if Powell will be drawn on any topic outside the stated reason for his Senate testimony. If he can be drawn to speak on topics outside the scope of the meeting, the USD bullishness could easily be boosted or damped by Powell's next outing.
Great Britain's FOMC equivalent is due this Wednesday. We will learn about any impending changes to The Bank of England's (BoE) monetary policy and discover any change in its stance regarding the factors affecting the GB economy.
It is unlikely that significant changes will be announced to BoE monetary policy on Wednesday. Nor is it likely that the BoE will take a hard stance on the country's economic outlook. The BoE could easily use the uncertainty created by the Government prolonging the country's lockdown, as well as and the evolution of the Delta Covid variant in the country to avoid making any changes to its projections. But, anything that indicates that the BoE will deviate from its existing monetary policy, or outlook in any economic sector will be carefully watched by the market.