Financial markets are preparing for a potentially historic week. Important CPI figures from Canada, Japan, and the United States come into focus. That data will be critical in determining if and when investors expect central banks in different economies to pivot on interest rates. Tuesday will see Canadian CPI figures, followed by Japan’s CPI on Friday. A key American CPI reading is due Friday and will have a big impact on USD trading strategies.
The coming week is especially important for investors expecting changes in monetary policy as inflation continues to evolve. Analysts are projecting that Wednesday’s CPI report will confirm a further slowing in prices charged in the factory sector. A more modest rise in the non-manufacturing subindex might be suggested. These figures will inform market expectations about future interest rate cuts, particularly in Canada, where economic conditions have prompted recent monetary policy adjustments.
Canadian Economic Indicators
The Canadian economy has been in the spotlight this week, as consumer prices dropped more than anticipated in September. This sharp drop sparked fears about the strength of domestic demand and the broader state of the economy. Faced with the deteriorating economic picture and increasing unemployment, the Bank of Canada acted. They cut interest rates 25 basis points – their first cut since March.
Investors will be hanging on every word and tick of the first CPI coming our way this Tuesday. The market now prices in 60% odds of one more cut. This should be determined at the Bank of Canada’s meeting on October 29. If the CPI figures provide confirmation of a slowdown in inflation, the odds of that occurring might increase. This unexpected jump could add further downward pressure on the Canadian dollar, the loonie.
Aside from the near-term effects of the CPI report, a big picture look at PPI has some analysts thinking about the big picture. Reversing Producer prices have made some promising headway, but still persist in deflationary land. This development reflects still strong worries about weakness in domestic demand and trade uncertainty. These developments emphasize the fine line the Bank of Canada has to walk in light of what seems to be a persistent fight against contradictory and volatile economic forces.
Japanese Inflation Outlook
Japan’s inflation data will become the focus of the week as the end approaches. The most closely held figures will drop this Friday, and they will be watched very closely. For the Japanese yen to maintain its recent upward drive, investors need to see inflation data which comes in more positive than expected. The rising prices that the Bank of Japan so desperately wants might raise confidence in the yen. This change would have serious ramifications for trading strategies.
The market is understandably concerned with Japan’s fight against inflation, especially considering Japan’s history with deflation. Analysts are speculating that a stronger-than-expected CPI report might trigger market talk of a policy shift for the Bank of Japan. Further changes would greatly expand these positive economic impacts. Any positive data must be considered in the context of an increasingly challenging global economic landscape. Trade tensions remain a key area of concern, so beware.
As traders digest these reports, they will not only assess immediate impacts but long-term implications for monetary policy in Japan. A consistent increase in inflation could prompt a reevaluation of Japan’s ultra-loose monetary stance, a move that would reverberate throughout global markets.
The U.S. CPI Report and Broader Market Implications
Equally important and immediately coming into play on the same day as Japan’s CPI release will be U.S. economic data. The U.S. CPI data for September comes out on Friday. Dollar traders are poised to see how it stacks up against their increasingly dovish expectations. Like all markets, participants are very focused on the data. They are hoping that it will show us either a continuation of the recent inflationary pressures or signs of easing.
This year’s report is about much more than dollars. It will have a huge impact on the Federal Reserve’s subsequent interest rate setting decisions. Importantly, all else being equal, if inflation stays calm in the months ahead it could cause investors to adjust their expectations on future rate cuts. Increasing inflation would make a stronger case for the Fed’s hawkish pivot. That would likely force them to make upward revisions to their monetary policy projections as well.