AUSTRALIAN DIARY: Everything you need to know about the week ahead for markets

Photo: Jonathan Daniel/Getty Images.

Stocks, commodities, bond rates and the Australian dollar were all lower last week as the proximity of this week’s US Federal Reserve meeting, disappointment with the ECB and OPEC, and year-end liquidity restraints combined to give traders a generally pessimistic tone.

The weakness in the Australian market was despite another incredible surge in employment during November. The ABS reported that 71,400 jobs were created, which took the two-month growth rate to its fastest pace since 1988. The recent surge has also driven the annual growth rate back to 3%, strongest rate since before the GFC.

History suggests this strength in employment could change the entire discussion on RBA interest rates in 2016 to rate hikes sooner than we think.

But, for the moment global macro issues are driving markets here at home and across the region.

Oil closed the week at $35.36, down an incredible 11.53% to the lowest weekly close since December 19, 2008’s $33.89. Iron ore’s crash continued below $39, BHP hit an intra-week low of $16.71, the lowest since 2005, and the ASX closed at 5,029, down 2.3%, resting on the uptrend line from September’s low. The Australian dollar, at 0.7186, was down 2 cents on the high the previous Friday and down 1.89% on the week.

It’s against this back drop that traders prepare for what could be another tumultuous week ahead. That’s despite the fact that the NAB said in its weekly “What to Watch” publication that “data flow comes to an almost screeching halt this week after the deluge over the past fortnight.”

That said, there are a couple of interesting releases this week in Australia, even if traders will have one eye glued to global markets in the run-up to Thursday morning’s Fed announcement.

Tuesday is the big day with the release of both the RBA minutes for December’s meeting as well as the Federal Government’s mid-year budget and economy review (MYEFO). The minutes are unlikely to reveal anything new although given the weakness in commodities again recently, but traders will be looking for any discussion on this and the Australian dollar’s recent strength above 70 cents.

The MYEFO is much more interesting. It’s unlikely to be market moving but traders will be hanging on growth downgrades and how that interacts with the budget blance this year and across the forecast horizon.

Westpac said in its Australasian weekly Friday that “the economic forecasts will be downgraded due to (1) weaker nominal GDP growth centred on lower commodity prices; and (2) slower trend growth, reflecting slower population trends.” They expect this year’s budget deficit to be revised $4 billion higher to $39 billion. ” The deterioration over four years is around $36bn.”

The NAB is a little more upbeat expecting only a $36.5 billion deficit this year. They are also a little more upbeat on the domestic economy.

We not only note that the lower iron ore price impacts more on the out years – assuming the Treasury will forecast iron ore prices remain close to current levels – but that the domestic economy has been better than expected, even though this may not yet the apparent in year-to-date tax receipts. Such effects are likely to flow in a more material sense from next financial year as a better labour market begins to deliver more income tax and associated revenue to the budget, notwithstanding slower rate of wages growth.

They expect 2015’s growth rate to be estimated at 2.75%, which is close to their forecast of 2.7%.

Tuesday also sees the release of ABS house price data for September.

RBA Assistant governor Guy Debelle is speaking on Wednesday about “some effects of the new liquidity regime.”

Thursday sees the release of ABS estimates of population and demographics. Not usually something anyone would look at but this one might be used as a sanity check in MYEFO’s assumptions.

Looking elsewhere Monday offers plenty of China news to digest. Having let the Chinese currency weaken to its lowest levels against the US dollar in 4 years over the past month the People’s Bank of China said Friday night that it might be time to drop the peg to the US dollar and move to a basket currency approach.

Were it not for the strong Chinese data over the weekend on retail sales, industrial production and urban investment, that might have caused a funk in Asia come Monday.

It may still because the switch to the basket is just another name for the Chinese wanting a weaker currency so they can compete more easily with their Asian rivals. That will put pressure on Asian and other emerging economies.

Japan releases the Tankan on Monday along with industrial production data. In the UK it’s house prices and in Europe the Italian CPI and EU industrial production is out.

Tuesday is a big day globally. The ZEW survey is out in Germany and then the UK and US release consumer prices. The Fed might have painted itself into a corner and need to hike rates regardless on Thursday morning (Wednesday US time) but the CPI data is important in helping inform market sentiment about what the FOMC’s ‘dot plot’ will look like.

The NAB’s economics team noted that “when the last FOMC projections were released on September 17, the median forecast for the fed funds rate at the end of 2016 was 1¼ – 1½% while the longer run expectation was for a funds rate of 3 ½%.”

This is likely to be the primary focus Wednesday night when the FOMC releases its decision. That’s because while the market almost universally accepts the Fed will tighten next week, it is the tone of the FOMC statement, what Fed chair Janet Yellen says in her press conference, and the latest dot plot that will determine if or how far the US dollar rallies, as well as the ructions in stock and bond markets.

German Ifo is out Friday but it’s really all about the Fed, what they do and what they say at 6am Thursday AEDT that will drive markets. That not only sets the tone for the week, but likely determines whether the Santa rally, which is due mid-month, materialises or not.

Here’s the NAB’s excellent calender of all the key data and events for the week.

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