London 30/11/2015 - All of the main events that have been driving markets come to a head this week, with policy updates from both the ECB and FOMC on the cards.
US
Expectations for the US Federal Reserve to raise rates from the lower bound on December 16 continue to grow and, with rhetoric from the FOMC remaining hawkish in tone, a rise before the end of the year has become a near-certainty.
The strong strong jump in October's non-farm payrolls to 271,000 was the initial driver of anticipation for a December lift-off. This lowered the the unemployment rate to 5.0 percent, which the Fed sees as full employment, which is part of its dual mandate. Although the US is expected to have created fewer jobs in November, a number above 200,000 is forecast.
The final manufacturing PMI - currently forecast to show that expansion has eased - is also due, providing a further update on a sector that has struggled under the weight of the dollar at times this year. Indeed, the dollar index has pushed back above 100 in expectation for the FOMC to raise rates.
This may start to erode the manufacturing sector's strength again, smothering growth by weighing on US global competitiveness. Although making imports cheaper in comparison, it leads to the US exporting domestic demand and effectively importing deflation, which compounds the situation.
CHINA
China's faltering economic momentum in the move towards a more consumer-driven economy has caused much concern across markets due to its key position as a global demand driver and its interwoven relation to the other emerging economies.
The official and Caixin manufacturing PMIs, both of which are forecast to continue to show contraction, will provide an update on its manufacturing sector this week.
Should the rate of contraction fall, it may trigger renewed speculation that the slowdown in the Chinese economy may have reached a turning point, indicating that stimulus is taking effect to help bolster growth.
The IMF has voted to add the yuan to its Special Drawing Rights (SRD) basket of reserve currencies from October next year. This is a very significant event as China moves along the path to having the yuan recognised as one of the world's reserve currencies. Although its inclusion is unlikely to trigger a ahort-term reaction, it may cause a shift in opinions.
There is speculation that this could precede a further currency devaluation, raising concerns of a renewed round of devaluations across the emerging economies as they attempt to remain competitive. But with the FOMC widely expected to start to raise rates from next month, we feel this is unlikely - the boost to the dollar would effectively perform the same fuction as a devaluation.
EU
The ECB is expected to extend and expand QE in December following weak growth and stubbornly low inflation. Following dovish comments by president Mario Draghi last week - he said the bank "will do what we must to raise inflation as quickly as possible" - this is effectively a certainty.
We would expect the ECB to raise the the size and field of its asset purchases albeit in several stages, allowing it the opportunity to tweak the policy and keep some of its powder dry.
An update on the state of inflation creation, part of the bank's mandate albeit one that has continued to elude it despite its best efforts, is due via the CPI flash estimate. While this is forecast to rise to 0.2 percent after it fell back into deflation in September, this is unlikely to stoke confidence in the ECB's inflation creation ability, especially while oil prices languish.
Soft energy prices have been cited as the main cause for low inflationary rates across the board, which has made inflation creation particularly difficult as central banks look to achieve their two-percent inflation targets.
The OPEC cartel meets this week. Saudi Arabian officials have already signalled that they will not look to cut production and will maintain output in line with demand.
METALS MARKETS
Forward guidance has effectively taken the mystery out of central bank action and, with both the FOMC and ECB expected to act next month, it has become more a case of by seeing how much will they act rather than if they will.
These growing expectations for policy change in the near term are reflected in the indecision across markets - investors are awaiting concrete action before committing.
