The first of the new year’s central bank meetings will get under way next week and it will be a heavy schedule on the data front as well. The European Central Bank, Bank of Japan and Bank of Canada will almost certainly be debating the latest setback to the recovery from the worsening Covid-19 outbreak. China will report its fourth quarter GDP print and flash PMIs along with inflation and retail sales numbers will be doing the rounds in most markets. However, investors will once again be gripped by the happenings on Capitol Hill in Washington amid fears of more violent scenes at Joe Biden’s inauguration and a possible vote in the Senate on Trump’s impeachment.
A surprise cut by the Bank of Canada?
Like many other countries, Canada has found itself under lockdown again as the second virus wave has more than surpassed the first peak, with deaths also surging in recent weeks. The sudden deterioration in the virus situation is already having a visible impact on the economy, leaving Bank of Canada policymakers in the lurch who only in October had decided to scale back their asset purchases by C$1 billion a week.
Increasing bond purchases is the most obvious option for the BoC to counter the downturn when it meets to set monetary policy on Wednesday. However, there’s been some speculation in recent days that the Bank may opt to cut its policy rate closer to zero, having previously flagged that 0.25% is the lower effective bound. Yet, despite the rumours triggering some selling in the Canadian dollar, interest rate futures are implying only about a 7.5% chance for a rate cut this week. That suggests there’s plenty of scope for the loonie to suffer more significant losses should the BoC deliver a shock cut or signal one.
With the BoC meeting garnering all the attention, Wednesday’s inflation data and Friday’s retail sales figures will probably struggle to attract much interest.
BoJ upbeat despite state of emergency being expanded
The Bank of Japan sounded a cautiously upbeat tone in its latest assessment of Japan’s economic regions, signalling a possible upgrade in growth forecasts when it publishes its quarterly outlook report on Thursday, which will accompany its policy decision. The brighter outlook comes amidst an escalating outbreak in Japan, which has prompted the government to extend the state of emergency to more prefectures.
But assuming that the vaccine rollouts proceed as planned, the only factor at this point that’s likely to force the BoJ’s hand to ease policy further is the weaker dollar. The blue sweep in the American Congress couldn’t have come at a better time for BoJ policymakers as it has boosted the US dollar just as it breached the 103-yen level for the first time since the March turmoil. If the dollar is able to sustain its rebound, there will be little incentive for the Bank of Japan to consider additional easing.
In the meantime, expect more uninspiring data to be released out of the country. Trade figures for December are due on Thursday, followed by the flash manufacturing PMI for January and December CPI on Friday.
China’s economy likely ended 2020 on a strong note
This time last year an unknown virus was causing havoc in China as it quickly emerged that the city of Wuhan was fast becoming the epicentre of what has now turned into a global pandemic. But a swift and forceful response soon brought the outbreak under control and given that manufacturers have been less severely crippled by lockdowns, China’s industrial-based economy has rebounded more strongly than its competitors. The fourth quarter GDP estimate is out on Monday and is expected to show the Chinese economy expanded by 6.1% on a yearly basis during the period to reach pre-pandemic growth levels. Industrial production and retail sales readings for December are also due the same day and these may stir a bigger response than the GDP report if they point to the global slowdown weighing on domestic growth.