Brazil's Sentiment Is Still Falling, Will Cut

Prattle is a text analysis company that uses proprietary algorithms to provide weekly research on central bank communications. This is a reprinted version of their Macrocast, originally published on their blog.

Prattle's models are based on the historical relationship between central bank language and market reaction, which is used as basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness.

Federal Reserve

Forecast: Speakers likely to reinforce message of minutes and signal December hike
Analysis: After a quiet holiday week, this week features eight speeches from six Fed speakers. Although we expect hawkish signals from all (especially Mester’s speech on December 1), the two speeches to watch closely will be Fischer’s and Dudley’s (November 29 before market open). These speeches will echo the restrained hawkishness* of  last week’s minutes (residual** 0.37, the highest in almost a year) and signal that the December rate hike continues to be the base case…unless something drastic alters financial conditions in the next two weeks.

European Central Bank

Forecast: Likely to emphasize financial stability and address concerns over a weak euro
Analysis: Benoît Cœuré will talk Greece, its debts, and the role it continues to play in the Eurozone, but all eyes will be on Mario Draghi this week as he testifies before the European Parliament. With the bank’s momentum slightly hawkish (0.35) and trend nearly neutral, we expect optimism about economic growth tempered by the need to address a weakening euro.

Bank of Israel

Forecast: Likely to hold rates, express more neutral tone on November 28
Analysis: While the bank’s sentiment has been somewhat dovish over the past few months, it’s now pulling back toward neutral. With reasonably strong economic growth and very low unemployment, we expect the Bank of Israel will hold rates this week.

Central Bank of Brazil

Forecast: Likely to cut Selic rate by 25 bps on November 30
Analysis: In the last six months the bank’s aggregate trend has fallen by roughly 2 standard deviations, but it has only cut the Selic rate once: 25 basis points in October. The continued decline in sentiment coupled with falling inflation (revised down from 1.6% this year to 1.0%) suggests the bank will cut rates once again. Although a 50 basis point cut seems justified by the economic data, sentiment has only marginally declined since the 25 basis point cut in October, they’ll likely maintain the current pace of rate cuts.

Bank of Canada

Forecast: Poloz likely to discuss growing importance of service sector
Analysis: Stephen Poloz is giving a speech on Monday, November 28 that will likely highlight the growing role of the service sector in the Canadian economy. Although monetary policy may not be directly addressed, this speech could clarify if the recent dovish shift (momentum -0.42) is a durable policy signal or just nerves caused by the uncertainty surrounding U.S. politics and trade.

Norges Bank

Forecast: Neutral/slightly hawkish sentiment likely to continue
Analysis: Egil Matsen has given just three speeches in the last year and all have been nearly neutral (-0.05, 0.08, and 0.10 respectively), so we anticipate neutral or slightly hawkish sentiment from Matsen when he speaks on December 1. His tone will likely be consistent with Norges Bank’s mild hawkishness (momentum 0.29).

* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as the basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness. Aggregate trend is the overall sentiment of the bank calculated using a LOESS fitting of trend using a 12-month window.

** Residual scores represent the tone of a communication compared to the rolling, 12-month average for that individual communication type or speaker. Raw scores represent the tone of a communication compared to the average of all communications. Momentum is the average of the last ten residual scores.