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

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Fundamental analysis of Forex market

After the BOC and the ECB provided markets with little new information regarding their bond buying programs at their respective interest rate decision meetings last week, the FOMC gets its turn this week.  With higher inflation and weaker than expected jobs data, will the Fed start talking about tapering? 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 push back their full reopening date.  In addition, the UK and Australia both release jobs data this week.  Will the data be better than expected or will they fall short, as did the jobs data from the US and Canada?  We’ll also get US May Retail sales and inflation data galore this week.   Are we through the transitory 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 purchase programs unchanged.  Given that the BOC has already begun tapering their bond purchases, many now feel that they will taper again when the central bank meets in July.  However, those hoping for a signal as to when the ECB would be ready to reduce bond purchases were left with the same questions. The phrase “significantly higher pace” of bond buying remained in the statement and Christine Lagarde said in the press conference that it was “premature” and “too soon” to begin discussing tapering bond purchases.

FOMC

Although the Fed is not expected to hike interest rates at this meeting, traders are wondering if the FOMC will be ready to begin discussing tapering bond purchases from current levels of $120 billion per month.  If so, Jerome Powell and gang will have to tip-toe around their language so as not to cause a “taper tantrum”, in which bond traders sell positions ahead of the unwinding of quantitative easing.  Since the last FOMC meeting, inflation has been higher than expected, with the most recent headline CPI at 5% YoY!   In addition, the FOMC was provided with 2 months of worse than expected Non-Farm Payroll data and there are still roughly 7.4 million people who haven’t returned to jobs since before the pandemic.  The Fed has indicated that they want to see a string of months of actual employment data on its way towards a sustained recovery before they begin to taper.  They also have said they will let inflation run hot while 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 begin talking about tapering?  This is the big question traders will be looking the FOMC to answer when they meet this week.

More Central Banks

In addition to the FOMC meeting this week, the BOJ, SNB, Norges Bank, and Central Bank of Turkey also meet. The most notable meeting will be from Norway’s Norges Bank, which has been hawkish as of late.  However, recent poor inflation data may cause members to tone down their statement as they wait for more clarity before signaling that they intend to raise rates.

Will the UK fully reopen on June 21st?

According the reopening roadmap for the UK, all economic and social restrictions will be lifted on June 21st.  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 by 2 to 4 weeks to allow more people to receive vaccinations.  A decision on whether to lift final restrictions on June 21st is expected on Monday.  Over 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, which could be helpful to traders looking for signals as to when their respective central banks may begin tapering.  In addition, the US and UK will release May Retail Sales, China will have a “data dump” on Wednesday, and inflation data will be released from several countries throughout the week!  The more important data releases this week are as follows:

Monday

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

Tuesday

  • Australia: RBA Meeting Minutes
  • Australia: House Price Index (Q1)
  • Germany: Inflation Rate Final (MAY)
  • UK: Claimant Count Change (MAY)
  • EU: Trade Balance (APR)
  • Canada: Housing Starts (MAY)
  • Canada: PPI (MAY)
  • US: Retail Sales (MAY)
  • US: PPI (MAY)
  • US: NY Empire State Manufacturing (JUN)
  • US: Industrial Production (MAY)
  • US: Manufacturing Production (MAY)
  • US: NAHB Housing Market Index (JUN)

Wednesday

  • New Zealand: Westpac Consumer Confidence (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 Rate (MAY)
  • US: Housing Starts (MAY)
  • US: Building Permits (MAY)
  • US: Fed Interest Rate Decision
  • Crude Inventories

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 Rate Final (MAY)
  • Turkey: TCMB Interest Rate Decision
  • US: Philadelphia Fed Manufacturing Index (JUN)

Friday

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

Earnings

There’s not much to discuss on the earnings front this week (and the next several weeks) as we inch closer to the end of the quarter.  Some of the more noteworthy earnings releases are as follows: TED, ORCL, AHT, BOO, BWY, LRN,HFD, HLMA, HOME, KR, ADBE

Chart of the Week: US 10 Year Yields

Source: Tradingview, FOREX.com

US 10 Year yields have been trending lower since the NFP data last Friday.  After retracing near 50% from the pandemic highs to the pandemic lows on March 31st at 1.774, yields began trending lower once again. However, once the NFP data was released, yields began moving aggressively lower.  On June 4th, yields formed a bearish engulfing pattern and moved from 1.635 down to Friday’s low of 1.428, just beneath the 38.2% Fibonacci retracement level from the January 4th lows to the March 31st highs.  If yields continue 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 June 4th highs provide the next resistance level at 1.635, just ahead of the downward sloping trendline off the March 31st highs near 1.665.  Note that traders may be buying bonds ahead of the FOMC meeting this week, which pushes yields lower, as they wait for the statement and press release outcome.

As the BOC and the ECB were unchanged last week, we look for guidance from the FOMC and other central banks this week.  Markets may be quiet until the meeting on Wednesday, but if there is any hint as to the timing of tapering, watch for yields to move higher with even the potential for a taper tantrum!

Have a great weekend!