Week ahead: inflation dominates, while markets await BoJ rate decision

Tuesday

Bank of Japan monetary policy decision

The Bank of Japan may have spent much of the past two-years sitting on their hands, but this month finally saw them belatedly discuss the potential for a hawkish shift just as markets start to plan for a dovish policy pivot from Western central banks. With Japanese inflation having pushed up to 3.3% in October, the question over whether will ultimately see the BoJ tighten rates will be key given the massive yen depreciation seen over recent years. Should we see another hawkish shift from the bank, it could point towards a swing into the yen for traders seeking to push back those currencies whose central banks are likely to push a particularly dovish pathway in 2024. While any adjustment to the headline rate does look unlikely at this meeting, markets will be keeping a close eye out for any signs over whether the bank does still plan to raise rates out of negative territory in the near future.

Canadian CPI inflation

Canadian inflation data promises to bring plenty of volatility for the CAD on Tuesday, with markets well aware that any steep decline from the October 3.1% figure will raise expectations for a strong easing pathway next year. However base effects point towards a difficult task ahead, with the November 2022 monthly figure of 0.1% being replaced. This highlights the potential for a somewhat underwhelming decline in annual CPI this time around. With the December 2022 reading of -0.6% signalling the potential for an uptick next month, the disinflation pathway only really looks likely to kick in once again with the January figures.

Wednesday

UK inflation

The UK inflation report raises questions over the Bank of England’s ability to drive down inflation quickly enough to allow for a swift pivot to monetary easing next year. With the current rate of 4.6% standing well above their peers, the Bank of England will be forced to remain patient until we see price pressures abate significantly from here. That may take some time, with the bulk of the disinflation likely to occur when chunky monthly figures across February to May are stripped out. Markets do expect to see headline inflation continue to track lower, but the question of pace and trajectory will be key for those trading the pound.

Thursday

CBI realised sales

This retail sales metric from the conference of British industry will provide markets with a leading indicator over consumer demand in December. Unlike the headline retail sales figure, this gauge covers the first weeks of the latest month. Recent signs of improvement will hopefully continue, with last month’s figure of -11 representing the highest in five-months.

Friday

UK retail sales

UK consumers come back into focus on Friday, with the headline retail sales figure covering consumer activity in the month of November. Given that this gauge provides detailed information for demand throughout a month that covers the Black Friday and Cyber Monday sales weekend, markets will keep a close eye on any signs of strength or weakness as a proxy for wider consumer demand in the critical Christmas period.

US core PCE inflation

The US core PCE inflation metric has long been favoured by the Federal Reserve. Falling somewhere between the core (4%) and headline (3.1%) CPI figures, the core PCE number stood at 3.5% in October. While energy and food prices have the ability to cause significant volatility in the headline inflation figure, the Federal Reserve will be keen to see this core PCE figure to fall back down towards target as they head into a year that looks set to be dominated by monetary easing.