It’s a busy week with US GDP, eurozone PMIs and three major policy announcements from the Bank of Canada, the ECB and the Bank of Japan. More hikes are certain for the first two of those major central banks, though the magnitude may cause some volatility. Officials at the Bank of Japan are stuck between a rock and a hard place. The UK is set to get its third Prime Minister in a year, though markets will have one eye on the fiscal plans slated for next Monday.

Thursday’s ECB meeting is likely to bring a second straight 75 basis point interest rate hike, taking the deposit rate to 1.5%, its highest level since January 2009. Policymakers are likely to reaffirm their determination to tackle record highs in eurozone inflation. Details on other levers to use to reduce price growth might also be discussed. These include shrinking the bank’s balance sheet which has ballooned to nearly EUR 9 trillion over the past decade. This process, known as quantitative tightening (“QT”), is already taking place at the Fed and Bank of England so the ECB is in effect playing catch up to these banks with policy tightening, which has been holding back any euro appreciation.

Japanese authorities are reported to have spent over $30 billion last week in their second intervention in a month to prop up the yen, after it slid past $151 to a 32-year low. It is a tough time for the BoJ as it defends its current policy of yield curve control with a rate cap of 0.25% on its 10-year government bond amid muted inflation while facing pressure from the Ministry of Finance to curb JPY freefall. Governor Kuroda is expected to stand firm and remain committed to ultra-loose policy at its meeting on October 28, even if that means more emergency bond buying. Meantime, there are few options to keep the yen from falling further, with the history books showing that unilateral intervention struggles to work over the long term.

The big question in the UK is whether the Conservative Party can unite behind a new leader and whether a more stable political backdrop can emerge. It this proves too difficult, then not only is there uncertainty surrounding future budget plans, but also whether the UK is closer to an early election.

Major risk events of the week

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24 October 2022, Monday:

–Eurozone PMIs: The market median estimate forecasts the manufacturing survey falling to 48.0 from 48.4. The services PMI is also predicted to decline, to 48.5 from 48.8. Analysts say a broad-based weakening in demand is beginning to materialise across the economy.

25 October 2022, Tuesday:

–IFO German Business Survey: Economists expect the business climate to worsen to 83.8 from 84.3. This would be the lowest level since the early stages of the pandemic in May 2020. IFO said pessimism has increased considerably looking ahead to the coming months while price expectations have risen again.

26 October 2022, Wednesday:

–Bank of Canada Meeting: Markets are currently pricing in around 70bps of tightening for this meeting. Recent inflation data came in higher than expected and the job market remains solid. But the latest business survey from the BoC showed that most companies expect a recession and house prices have started to decline.

27 October 2022, Thursday:

–ECB Meeting: Another 75bp rate looks likely with the latest headline inflation rising to 9.9% and the core print to 6%. President Lagarde recently stated that rate hikes will take place over the course of the next several meetings. Details on other ways to reduce price growth, like shrinking the ECB’s balance sheet known as quantitative tightening (“QT”) may be discussed.

– US Q3 GDP: Analysts forecast growth of 2.3% after the two previous straight quarters of negative readings saw a technical recession. Trade and inventories should both contribute positively to the data in this quarter. But consumer spending and residential investment will be a drag on growth.

28 October 2022, Friday:

–Bank of Japan Meeting: Expectations are for the bank to stand firm with its ultra-loose monetary policy. Governor Kuroda could warn that the recent currency movements would have a negative impact on the nation’s economy. But analysts doubt the JPY depreciation will trigger any changes in the BoJ’s policy stance.