The
week ahead is dominated by central bank meetings. Six of the G10 central banks
meets. The post-Covid monetary tightening cycle is ending. The start was not
synchronized, and neither will be the end. It is tempting to think that those that
began the tightening cycle early will among the first to finish. Among emerging
markets that is true for Brazil and Chile, both of whom have begun cutting
rates. And Brazil is likely to deliver the second cut in the new easing cycle,
a few hours after the Federal Reserve meeting concludes this week. No G10
central bank appears to be close to reducing rates, but the tightening cycles
seen to be over or within a quarter point of the terminal rate. The UK may be
an exception, but even then, the market is not convinced, especially after
July's GDP disappointment.
In our age of precision, it is as if we
have taken the assessment of the central bank's stance and added an extra decimal point.
It no longer seems to suffice to describe what they did, but
also an assessment of the forward guidance or thrust. In this context, it means
that the market favors a hawkish hold by the Fed, where it stands pat, does not
rule out additional hikes and revises up growth and perhaps the outlook for
policy next year. On the other hand, the Norges Bank of Norway and the Riksbank
of Sweden are understood to have signaled a hike this month (September 21) but
are likely to be less hawkish in the forward path of rates that they projected.
The continued easing of price pressures boosts the chances that Swiss National
Bank stands pat. The euro sold off on the ECB's hikes as it suggested the
monetary tightening cycle was over. The SNB may not feel the need to rule out
another hike, but the market suspects it is done. The swaps market has about a
75% chance of the Bank of England hiking rates on September 21, even after the
economy contracted by 0.5% in July, more than twice as much as economists
expected. The key question is whether there is a hike left before the end of the
year and the swaps market sees it as a 50/50 proposition. Lastly, the Bank of
Japan meets on September 22. After adjusting the Yield Curve Control policy, to
ostensibly allow the 10-year yield to rise to 1.0% at the last meeting, and
Governor Ueda pointed to a decision on rates toward the end of the year, it
will likely do nothing at this meeting.
Let's dive a little deeper:
Federal Reserve (September 20): The market never thought a hike this month
was likely. The implied odds in the futures market have not gone much above 20%
since the July meeting concluded. Now, after the energy-driven firmness in CPI,
PPI, and retail sales, the Fed funds futures imply practically no chance of
hike. The market has downgraded the chances of a November meeting to about 35%
(~roughly halved from late August). Still, there is no reason to expect Chair
Powell to rule out another hike. That said, the market has shown a tendency to
read the statement as hawkish and hear Powell more dovish. Still, a hawkish
hold is likely to be the main takeaway. The economy's resilience has not only
surprised investors but policymakers as well. In March, the median dot was for
0.4% growth this year. It was raised to 1% in June and could be lifted to 2%
now, which would match the median forecast in Bloomberg's survey. The IMF is at
1.8%. The median Fed forecast for the PCE deflator was 3.2%. It stood at 3.0%
in June and 3.3% in July. We suspect there is scope for the median be shaved a
little. The median unemployment rate was at 4.1%. This seems a little high as
it stood at 3.8% in August. Lastly, recall that in June, the median Fed
expectation was for two hikes in H2 23 before delivering four cuts in 2024.
Here, we expect median dot to be lifted from the 4.625% seen in June to 4.875%,
implying one less cut, and not removing the second of two hikes anticipated in
H2 23. The media will have an opportunity at the press conference following the
FOMC meeting to ask the Chair about the rise in oil prices. And even if they do
not, we suspect it will become a more salient issue. The Federal Reserve has
viewed the rise in oil prices as not necessarily inflationary, but quite the
opposite. Higher oil prices could be a relative change in prices not a general
increase in price levels. Higher oil prices act as tax. The more money needed
for gasoline and heat/air conditioning, the less available for other
things/services. The Covid economic crash was an anomaly, but typically a sharp
rise in oil prices (doubling) proceeds the end of the US business cycle
(recession). Last, we note that despite all the talk of de-dollarization, when
the Fed moves, several Middle Eastern central banks will match it, including Saudi
Arabia and the UAE, and Hong Kong, China's special administrative region.
Bank of England (September 21): Average weekly earnings accelerated to a
new record high in July although other indicators of the labor market slowed.
The monthly GDP print for July contracted by 0.5% amid broad-based weakness
(industrial production, services, and construction fell). This puts at risk the
Bank of England's forecast for Q3 GDP of 0.4%. Seemingly dovish comments by
Bank of England Governor Bailey shook the market's confidence that two more
hikes would be delivered this year. The swaps market cut the odds of a
quarter-point hike this week to around 70% from a small chance of a 50 bp hike
in late August. The market has also trimmed the likelihood of another hike in Q4
to a about 30%. It was fully confidence confident as recently as late August.
The UK will report August CPI the day before the BOE meeting. Despite the
increase in acceleration of average weekly earnings (to 8.5%, 3-months,
year-over-year, July CPI fell by 0.4% bringing the three-month
annualized pace to about 1.2% from over 12% in the prior three-month period.
The year-over-year pace fell from 10.5% last December to 6.8% in July. Price
pressures may ease a little in August and September before taking a big leg
down in October, when last year's 2.0% increase drops out of the 12-month
comparison. The Bank of England forecasts CPI to slow to 5% by the end of this
year and 2.5% by the end of 2024.
Norges Bank (September 21): When Norway's central bank lifted the
deposit rate by 25 bp to 4.0% in mid-August, it indicated scope for another
hike this month. Yet after the unexpectedly large fall in August CPI (-0.8%)
and the underlying rate (-0.6%), which excludes energy and adjusts for tax
changes, the market has grown a bit skeptical. The year-over-year increase in
Norway's CPI has fallen to 4.8% from 7.0% in January. The underlying rate stood
at 6.3% year-over-year in August, down from the 7.0% peak in June. Given the
base effect, both the headline and underlying measures of inflation should fall
sharply this month. The swaps market is pricing in less than a 20% chance of a
hike. The Norwegian economy stagnated in Q2 after expanding by 0.3% in Q1 23
but is off to a stronger start here in Q3. The monthly GDP rose by 0.3% in
July. After the Japanese yen (~-11.3%), the Norwegian krone is the second weakest
currency among the G10, depreciating about 8.5% against the dollar so far this
year. The krone's weakness seems to run against the idea it is petro-currency.
The price of Brent is up about 8.7% year-to-date. The weakness also seems
inconsistent explanatory models that seek to link a currency with the external
account. Norway enjoys a current account surplus of more than 20% of GDP. Its
budget surplus is also greater than 20% of GDP.
Riksbank (September 21): Sweden's Riksbank is a little behind the
Norges Bank in the monetary cycle. A quarter-point hike is widely expected at
this meeting, which will bring the deposit rate to 4.0%. Another hike in Q4
seems likely. Official comments put an emphasis on the underlying core rate,
which uses a fixed interest rate and exclude energy. Although, it has been
trending lower since peaking at 9.3% in February, at 7.6% in August, it remains
unacceptably high. The economy contracted by 0.8% in Q2 after Q1 growth was
revised to 0.4% from 0.6%. The Riksbank forecast that output will decline by
0.5% this year, which may be optimistic. In addition to the weakness in the
manufacturing sector that is a problem among most high-income countries, Sweden
also suffers from a dramatic drop in house prices. In nominal terms, Sweden's
house prices have fallen by 12% year-over-year. In inflation-adjusted terms,
they have fallen by 22% in Q2 year-over-year. This is an important factor
depressing consumption, which the Riksbank sees contracting by 2.4% this year.
During the pandemic year of 2020, Sweden's consumption fell by 3.2%. The
Swedish krona has depreciated by about 6.6% against the US dollar this year and
has fallen to record lows against the euro, where it continues to linger.
Swiss National Bank (September 21): In Bloomberg's survey 24 of 27 economists
expect the Swiss National Bank to lift the policy rate by 25 bp to 2.00%. The
swaps market is less sanguine and appears to have discounted about a 35%
probability. The EU harmonized measure of CPI has slipped below 2% in August.
The base effect warns that inflation may rise through the end of the year. Last
year, the monthly reading was negative for three of the last four months of the
year. The Swiss economy stagnated in Q2 and the median forecast in Bloomberg's
survey forecasts a 0.3% growth this quarter. In fact, beginning in Q3 22, the
economy has alternated between quarterly expansions of 0.3% and flat activity.
The Swiss franc is strong against the euro. The euro recorded the year's low in
late August near CHF0.9515 and approached it after the ECB's dovish
hike last week. Recall that last September, it had fallen to nearly
CHF0.9400, which it may have traded below once, as the exact low in January
2015, when the SNB moved the euro floor/franc cap is still debated, though some
platforms show it spiking to almost CHF0.8500. On balance, we think that SNB can be the big surprise in the week ahead if it stands pat.
Bank of Japan (September 22): The BOJ may be hoping for a hawkish hold.
It is too soon after adjusting doubling the upper band of the 10-year JGB to
1.0%. Governor Ueda recent comments point to the end of the year timeframe to
re-evaluate the negative policy rate (-0.10%). The market's initial response to
the comments was to take the dollar down about 1.5%, which was not enough to
cause much consternation. It retraced a little more than half of this month's
gains before buyers reemerged and lifted the dollar back above JPY147.00. The government
has already expanded and extended gasoline subsidies through the end of the
year. The subsides help dampen the increase in headline CPI. A supplemental
budget it likely. The market looks as if it were fishing for the pain threshold
of official and took the dollar to new highs ahead of the weekend, slightly shy of JPY148. Still, implied volatility remains relatively low (one-month is
near 9.2% compared with around 12.5% last September and above 14% when the
intervened last October).
Emerging Market Central Banks: Three emerging market central banks look
likely to adjust monetary policy. First, as we noted, Brazil's central bank,
which pursued an early and aggressive tightening cycle, is poised to deliver
the second 50 bp cut on September 20. It would bring the Selic rate to 12.75%.
The IPCA measure of inflation bottomed in June at 3.16% and rose in July and
August to stand at 4.61%. This is primarily a reflection of the base effect as
the IPCA fell on monthly basis last July-September. On an
annualized basis, Brazil's IPCA inflation has risen by slightly less than 1.1%
over the past three months. Second, following Turkey's election in May,
President Erdogan has turned back toward orthodoxy. The new economics team has
hiked the one-week repo rate from 8.5% in May each month since and it now
stands at 25%. Given the jump in August inflation to about 59% (from ~47% in
July), another hike looks likely. The median forecast in Bloomberg's survey is
for a 500 bp hike (to 30%) on September 21. Third, higher food prices,
including rice and vegetables, and a weak peso may spur the Philippines central
bank to hike the overnight rate from 6.25%, where it has been since March.
Consumer prices, which had fallen from 8.7% in January to 4.7% in July, rose to
5.3% in August. They rose 1.1% in August alone after rising by a cumulative
1.6% in the first seven months of the year. The central bank is believed to
have intervened to prevent the dollar from rising about PHP57.0. It has not
closed below PHP56.50 for three weeks, giving officials little breathing space.
A rate hike could help reinforce the cap.
Reviewed by Marc Chandler
on
September 16, 2023
Rating:
