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All Eyes on the Fed: Global Week Ahead

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All eyes will be glued onto the Fed during this Global Week Ahead.

On Wednesday, the FOMC likely hikes 25 basis points, after its two-day meeting.

Below is a summary of core expectations and risks, gratis Scotia Bank:

Fed funds target range: All dealers and banks including Scotia expect a 25 bps hike in the fed funds target range, which would take the upper bound to 2.50%. Markets are still not fully priced for a hike, leaving open the chance of a dovish surprise.

“Further gradual increases”?: The minutes noted the statement reference to “further gradual increases” might need to be revised in a way “that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook.”

Fed funds projection: Prior 2018–19 projections for the mid-point of the target range to end at 2.375% and 3.125%, respectively, will remain unchanged.

Growth and inflation forecasts: Relative to the projections that were last updated in September, there may be a focus upon revising PCE inflation expectations lower over 2019 and perhaps further out. Oil market developments since the last projections could be used to inform such a forecast bias.

Neutral rate: Don’t expect any changes. The minutes to the November meeting indicated that only “a couple of participants” believed that the policy rate “might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion…” The Fed’s neutral rate estimate of 3% probably remains reasonable at this point.

Language: The statement could soften reference to “strong” job gains and the unemployment rate “has declined.”

Balance sheet: This is the meeting at which the long-awaited balance sheet discussion is likely to occur.

What follows? These are the five big Reuters in London global market themes.

These themes will likely dominate the thinking of both investors and traders in the Global Week Ahead. Not surprisingly, the list leads with the Fed.

The Reuters list also includes a Bank of England meeting (with its Brexit worries) and a Bank of Japan meeting (with its negative rate still on). Their list ends with a discussion of the end of “QE” by Mario Draghi of the ECB.

In short, this week is all about monetary policy, wherever you look.

(1) The FOMC Meets and Hikes

The Federal Reserve is almost certain to hike U.S. interest rates for the fourth time this year to 2.25-2.50 percent on Wednesday, but it will be ‘What they say, not what they do’ that really matters.

Money markets have swung dramatically in recent months and are now only fully pricing one more hike in 2019, having expected another two or three (at least) earlier in the year.

The reason for the shift is that the U.S.-China trade war and the Fed’s tightening are already taking a toll on growth and on the stock market. With large parts of the U.S. equity market already in bear-market territory, investors will hope for comforting words from the Fed. Slower — or no — rate rises in 2019 would be the perfect early Christmas present.

(2) The BoE, U.K. Pound and Brexit

With sterling set for its biggest weekly drop in seven weeks after a tumultuous week in British politics, markets are slowly digesting the possibility that the UK could crash out of the European Union at the end of March without a deal.

Though the majority of analysts think that an iteration of Prime Minister Theresa May’s current deal will ultimately be passed by parliament, some investors say signs of stress are emerging in British assets, similar to what was seen during the dark depths of the Eurozone crisis.

For example, 90-day correlations between the benchmark UK stock index and the British pound has strengthened in recent days — normally both these assets move inversely to each other.

The cost of insuring against a UK debt default is at the highest since the 2016 vote and some big banks say a lurch into a ‘hard’ Brexit where ties are badly severed would hack another 5-10 percent of sterling.

(3) Don’t Forget About the Bank of Japan (BOJ)!

It is rare for the Bank of Japan to rock the boat at its policy meetings, but the ship Haruhiko Kuroda is steering is so large that even miniscule maneuvers can cause massive waves. After all, the BOJ’s balance sheet has just surpassed the size of the economy, raising questions of how this can ever be unwound.

Speculation of the BOJ’s dissatisfaction with elements of its ultra-loose monetary policy, especially the impact on smaller banks, has raised some expectation that bond markets could be allowed to trade in a slightly wider range. The BOJ also owns almost 80 percent of Japan’s ETFs, which critics say distorts the stock market.

Alas, though, any intention to tweak policy towards the tighter side will have been foiled by the economy’s latest developments. Japan is clearly de-syncing with the rest of the world economy — its economy just shrank the most in four years and export orders are seen contracting at the fastest pace in two years, a consequence of the trade war embroiling its mighty neighbor next door and a peaking electronics supercycle. And inflation is nowhere near target.

Expect Captain Kuroda to maintain a steady course ahead.

(4) Emerging Market Stocks… Down Hard in 2018. Where from Here?

MSCI’s emerging currency index is down 25 percent from its January highs but signs of a very modest rebound in recent weeks have provided some hope for next year.

Of course, huge dollar borrowings in EM means the fate of many is still in the hands the Fed and the greenback, but local central bankers do have some sway and there are a multitude of rate meetings coming up.

Following another hike from arch hawk Russia on Friday markets reckon more hikes are possible in Indonesia, which has upped rates six times already in 2018, the Czech Republic where policy has tightened four times in a row and in Mexico, which raised rates in November for the third time to a decade-high.

Thailand may deliver a rise for the first time in seven years, and there are also rate-setting meetings in Colombia and Taiwan to watch, too. But here’s the rub — expectation is building that the U.S. Fed will pause after one more hike next year. If it does, emerging markets, might find 2019 more relaxing than feared.

(5) It’s a Post “QE” World After the ECB Meeting

In less than two weeks the ECB’s 2.6 trillion-euro stimulus extraordinaire draws to a close, but Eurozone share prices, especially for banks, are lower today than in 2015 when the printing presses were switched on. But hope dies last.

Many reckon the very fact that Mario Draghi feels confident enough to end QE is a good sign. Draghi did downgrade growth and inflation forecasts, but banks and their investors are clinging to hope that prices might move up enough to justify a rate hike towards end-2019.

They could argue that even after QE ends the ECB will remain in the market to reinvest the proceeds of maturing bonds. What’s more, lenders would benefit if it meets expectations of a new round of so-called LTROs, cheap long-term loans to banks.

Another positive is the apparent ceasefire between Italy and Brussels over the former’s 2019 budget. Potentially that allows Italian banks to get on with the business of cleaning up their balance sheets; consequently, the Milan banking index was flat this week.

Finally, there is nothing like M&A activity to get shareholders excited — this week’s talk of a merger between German behemoths Commerzbank and its troubled peer Deutsche, has sent shares in both spiraling.

Top Zacks #1 Rank (STRONG BUY) Stocks—

Telefonica Brasil S.A. (VIV - Free Report) : Shares are $12 here. The economic growth is looking better down there. When is the right time to buy emerging market stocks like this one?

This is a $21B market-cap Telco behemoth. These Brazilian large-cap shares put a sub-$10 price bottom in this September.

E*Trade (ETFC - Free Report) : I was surprised to see this $11B market-cap stock make our list this week.

It’s been a terrible year for investors, and likely a rocky year for traders, unless they were short, and cleanly right about their short timing, too.

Qualcomm (QCOM - Free Report) : This 5G next-generation supplier of wireless technology is just range trading this year, despite the high Zacks Rank. It might be worth swing trading it, now that it is back to its low in the range. The stock has $70B in market cap at the moment.

There is a 4.3% annual dividend here. So many cash-flow-rich Tech companies price their shares at a steep discount heading into 2019, thanks to the short sellers this year. Many Tech shares are now great income-producing gems.

Key Global Macro—

Yes. The Fed is Wednesday. Sweden’s Riksbank, Japan’s BoJ, England’s BoE and likely other central banks follow up with their decisions that day, or the next.

On Monday, the Eurozone CPI comes out. It has been tracking +2.2% y/y.

Brazil’s proxy GDP growth rate came out at 2.99% versus a 2.0% y/y forecast. That is welcome news.

The U.S. NAHB Builders survey comes out.

On Tuesday, the unemployment rate in Hong Kong is 2.8%. While there is a US-China trade war, it’s not real (yet?) in Hong Kong.

U.S. Housing starts (1.23M is consensus) and Building Permits (1.23M is also consensus) come out.

On Wednesday, the CPI in Canada gets updated. It should fall from 2.4% y/y to 2.1% y/y, likely due to falling WTI oil prices. This is not a ‘core’ reading.

The FOMC should strike out and move the Fed Funds rate from 2.25% to 2.5%.

Powell will hold a presser.

The Bank of Japan (BoJ) should keep its negative deposit rate on at -0.1%.

On Thursday, Australia’s unemployment rate comes out. It has been 5.0%.

Sweden’s Riksbank should keep its negative -0.5% rate on, after its monetary policy meeting.

The Bank of England (BoE) will likely keep its Bank Rate at 0.75%. The Brexit vote is too worrisome.

U.S. initial claims are 206K. That’s quite low. I am speaking to all of the ‘bears’ out there, specifically.

The Philly Fed Survey comes out.

U.S. leading indicators also come out. These should rise 0.1%. Again, all ‘bears’ should be paying attention here too.

On Friday, Brazil’s inflation rate should get to 4.19% y/y. Is Brazil turning a corner? That’s a decent rate for them, and will allow ultimately for lower policy rates.

U.S. personal spending and income figures come out. A consensus for +0.5% and +0.6% are looking strong here.

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