Week Ahead: Bonds, Energy & Central Banks

Key Events

• Fed minutes under the microscope: Will they confirm a delay to an October rate hike, or leave the door open to fresh tightening?

• Debt markets and energy raise inflation risks: Rising government bond yields and energy prices continue to put inflation back at the center of market attention.

• Euro, yen and China in focus: Eurozone inflation, Japanese data and the return of Chinese markets could move currencies and global markets.

Introduction

Investors are entering the first full week of the year's final quarter amid a mix of rising government bond yields, persistent energy pressures and shifting interest rate expectations.

Although the economic calendar is not unusually crowded, a number of events could be enough to move the dollar, major currencies and financial market assets.

This follows a decline in expectations of a rate hike at the meeting later this month, while markets continue to watch whether inflation and higher energy prices will push central banks to keep monetary policy tighter for longer.

U.S. Economy: Fed Minutes Top the Economic Calendar

Markets will turn their attention this week to Wednesday, when the minutes of the Federal Reserve’s latest meeting are due to be released, as investors look for clues about the future path of interest rates.

The minutes take on added importance following the recent decline in market expectations for an October rate hike, while the possibility of further monetary policy tightening in December remains on the table, according to the CME Group’s FedWatch Tool, as shown in the chart below.

Source: CME FedWatch Tool, cmegroup.com

Alongside this, several important economic releases are due, most notably:

•       Services PMI

•       Employment Trends Index

•       Trade balance

•       Retail sales

•       Consumer inflation expectations

These releases are particularly important for their price, employment and new orders components, offering a gauge of whether activity remains strong, how much price pressure is building on sales, and how willing companies are to hire.

Europe: Inflation Pressures the European Central Bank

The European economy was hit by an inflation shock last week, with inflation rising to a three-year high of 3.8% in September. This adds pressure on the European Central Bank at a time when the region's economies are also facing higher energy costs.

On Thursday, investors will receive the minutes of the ECB's latest meeting, which may offer a clearer picture of how concerned the bank is about inflation staying elevated, and whether policymakers lean toward keeping the door open to further tightening.

Several economic releases are also due, most notably producer prices and retail sales, which will be closely watched as government bond yields in Europe climb.

Japan: Inflation and the Yen Face a New Test

The Japanese yen is back in focus as the dollar stays strong and inflationary pressures build. Recent data showed that core inflation in Tokyo rose to 2.7% in September, above the 2% target, reinforcing the debate over the need for further rate hikes.

A number of economic releases will be at the center of investor attention, with wages and household spending the most prominent, to determine whether rising prices have been accompanied by a genuine improvement in household income and domestic demand for goods and services.

These readings matter for the Bank of Japan, which is trying to confirm that inflation has become sustained rather than merely the result of higher energy and raw material costs.

With the yen still weak, any strong wage data or signs of improving consumption could bolster expectations of a rate hike, while weak data may put renewed pressure on the currency.

China: Markets Return After the Holiday

Chinese markets resume trading after the Golden Week holiday, putting the strength of the domestic economy and internal demand at the center of attention in Asia. September data showed the official manufacturing PMI returning to expansion territory (above 50), while the non-manufacturing index also rose.

However, the picture is not entirely positive, as the consumption and property sectors remain a challenge for Chinese policymakers.