The Week Ahead - 22nd November

It's another busy week ahead for financial markets and not just in terms of economic data or central banks. What we're all eagerly waiting for is an announcement on the next Fed Chair. Will Biden reappoint Powell for a second term? Or will it be Lael Brainard who takes the top job? The main scheduled release to watch will be the FOMC minutes Wednesday to gain a picture of just how hawkish the committee is becoming. We get revised estimates of GDP for the US too. 

Across the pond it's ECB minutes Thursday, we also get various survey data across the week. Finally, in APAC we have the RBNZ and South Korea with monetary policy decisions. 

Oh yeah, and there's this small thing the Americans have called Thanksgiving. Watch out for volatility in low volume markets Thursday. 

Highlights for the week ahead:

Source: Reuters (Brainard - Left; Powell - Right) 

Who's going to lead the Fed next year? This is the question which is top of mind for most investors. This week, I'm favouring short USD positions simply because I think there is an outsized chance that Powell will be out and Brainard will be in.

Brainard is significantly more dovish than Powell. This would likely point to a much more patient Fed (see the cheat sheet below for details). 

Source: ITC Markets 

I also feel like Powell being replaced would be a bit of a shocker for markets, so while it would almost certainly have a negative USD impact, I don't necessarily think the easy money attitude of Brainard would be good for equities in the short run. This is because inflation is the key for now, and a Fed which would make a serious policy error on inflation is probably more likely under Brainard... in which case a rapid hiking cycle would likely be painful. 

FOMC Minutes: 

We have more Fed news ahead with the FOMC Minutes being released Wednesday. Personally, I don't think this will be as exciting as some pundits are making it out to be. End of the day, we know they decided to taper. The key will be to see how much they talk about adjusting the PACE of asset purchases. If they are keen to say they will increase the pace to respond to various inflation signals, this will be pretty key. 

ECB Minutes: 

I suspect this will be as dull as dishwater. They're dovish, they're holding rates forevermore. What more is there to say? Well, the only thing I'd watch for is any discussion of dissents. Maybe some of the hawks are starting to come alive a bit more. The chart below shows German Inflation... and it's running HOT relative to what the Germans are used to. If this isn't transitory, there will be some who want to act to curtail inflation excesses sooner rather than later. 

Source: Refinitiv

The RBNZ: 

The next RBNZ meeting is on the 24th November, and markets are pricing in a 100% chance of a 25bps rate hike, and some are calling for a 50bps hike. This reminds me much of the story last month where everyone expected a dramatic pivot from the BoE, and then it didn't happen. Yes, I think the RBNZ will hike 25bps, but the 50bps in my opinion is unlikely. 

If we do only get 25bps, then that 50bps positioning will have to be unwound, so my bias this week is for lower NZD, but I probably wouldn't actually put the trade on since any talk of further hikes in the future could probably offset any short-term downside pretty quickly. 

Source: Refinitiv - implied rate is 0.869% for the meeting. Basically a 50% chance of a 50bps. 

Other than that... 

Watch out for Fed speakers and ECB speakers left, right and centre. Clarida stung me last week on Friday, so be careful out there. 

Non-Sequitur: Thanksgiving 

Source: AP

President Biden pardoned two Turkeys over the weekend, Peanut Butter and Jelly. Did you know, that on an average Thanksgiving Americans consume over 46 million Turkeys. The average Turkey serves about 10 people, so that's 460 million servings! I guess everyone needs a cheat day : )