Normally we look at macroeconomic news to provide the incremental additional information that shapes the expected returns on investments.  However, in the week ahead, the macroeconomic data is of less importance than the reaction function of policymakers. What we mean by this is how policymakers will respond to the recent data may be a bigger driver of financial assets than the new data.  

Recall that the ECB staff cut its growth and inflation forecasts.  Is that not a necessary pre-condition for a policy response?  Japan recently reported an unexpected decline in industrial output and the BOJ’s core inflation measure (excluding fresh food) slipped back into negative territory for the first time since April 2013.  Is this something that monetary policy can address or should fiscal policy?   Will the apparent pick-up in wage pressure in the UK over the past few months push the Bank of England toward a more hawkish posture?

The Federal Reserve officials were likely as surprised by the weakness of the September jobs report as were market participants.  There was nothing in the ADP estimate or weekly jobless claims that had hinted at the weakness.  Did the disappointing jobs data really redeem the Fed which was criticized for not raising rates last month?  Will the jobs data be understood by the central bank as a sign that the economy is deteriorating, as the cynics have argued, and require additional monetary stimulus in the form of new asset purchases as former Treasury Secretary Summers and others have claimed?   

There are three major central banks that meet in the week ahead.  They are the Reserve Bank of Australia, the Bank of Japan, and the Bank of England.  None is expected to change policy.  If there is a surprise, the Reserve Bank of Australia is the most likely candidate.  The policy has been on hold since May.  The headwinds emanating from China and through a negative terms of trade shock are still feeding throughout the economy.   However, with recent economic data firm, and the Australian dollar chopping around its recent trough, the RBA need not be in a hurry to cut rates now.

Despite some investment houses and media playing up the risk that the Japanese economy contracted in the June-September quarter for the second consecutive quarter, the Bank of Japan continues to be relatively optimistic about both inflation and growth.  The unexpectedly strong rise (2.9%) in August overall household spending suggests a contraction was likely averted.

BOJ Governor Kuroda has repeatedly indicated he would look past the impact of the decline in energy prices on inflation.  Although the BOJ has not formally shifted its target measures, Kuroda does appear to be giving greater weight to a measure of inflation (core-core?) that excludes food and energy. This measure stood at 0.8% in August, which is the highest since last year’s retail sales tax dropped out of the year-over-year comparison. There is some risk that even this level of inflation overstates the case. The past weakness of the yen appears to have contributed to the increase in import prices. The yen is essentially flat this year, meaning that the upward pressure on import prices may lose a support.