Key events this week – Monetary policy decisions; FOMC, BoE, SNB, & BoJ, CPI: Eurozone, UK, Canada, & Japan, Prelim PMIs Sep
Recap from last week
We have previously noted that central banks have been shifting to a pause in the rate hiking cycle, having (hopefully) reached a sufficiently restrictive level of policy rates. Global central banks all appear to be following a similar risk management approach by retaining guidance that further tightening may still be required while inflation remains above target.
Last week, the ECB raised its policy rates by a further 25bps. The increase reflects the assessment that inflation remains too high. However, the also ECB signaled that it may join other central banks in shifting to a pause in the cycle. The ECB considers that growth is likely to stay ‘subdued’ in the coming months and that policy rates have ‘reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target’. The ECB maintained its data-dependent guidance – that decisions on rates would still be based on the assessment of the path of underlying inflation.
US data since the end of July is unlikely to have changed the expectation for a Fed pause this week. However, resilient growth and CPI data may be enough for the FOMC to keep a further hike in the dots. US CPI for Aug was as expected – with an acceleration in headline inflation due to higher energy prices. Core inflation measures suggest that progress on inflation likely slowed this month. Nominal retail sales were higher than expected with growth heavily influenced by higher gasoline prices in the month. In real terms, annual retail sales growth remained stalled. Slower growth in manufacturing output for Aug was led by a 5% fall in the output of motor vehicles (reversing the prior month’s increase). The NY manufacturing survey for Sep was a bright spot – pointing to some stabilization in the recent trend of weaker regional manufacturing conditions. This included a further improvement in outlook sentiment.
Outlook for the week ahead
The focus this week remains firmly on central banks and monetary policy meetings.
The FOMC is expected to stay on hold this month. The FOMC is likely to note; resilient US growth, some easing of tight labor market conditions, and progress on inflation, despite remaining too high. The dot plot will provide some insight into the expectation for the path of rates from here. Markets have also been pushing out the timing for rate cuts. Other US data out this week includes US housing construction data. Permits are expected to be little changed at 1.44m (SAAR), starts are expected to slow to 1.44m, and existing home sales are expected to improve slightly to 4.1m (from 4.07m SAAR). Initial claims are expected to stay low at +226k.
The BoE is expected to increase its policy rate by 25bps. The last decision was not unanimous, so there could be further disagreement this week. In the inter-meeting period, UK inflation has stayed high, there has been a further rise in unemployment, and growth momentum has slowed. The latest CPI report for Aug will be released before the BoE meets this week. Headline inflation is expected to increase to +7.1% in Aug (from +6.8% in Jul), with the monthly rate rising from -0.4% in Jul to +0.7% in Aug. Core inflation is expected to stay elevated at +6.8%.
The SNB will meet this week and is expected to raise policy rates by 25bps.
The BoJ will meet this week and is expected to keep policy settings unchanged. There has been some signaling by the BoJ in the inter-meeting period that it could consider a further adjustment to policy settings by year-end. The latest Japanese CPI report will be released before the BoJ announcement. The main measure of core CPI ex fresh food is expected to remain mostly steady at +3% in Aug, down slightly from +3.1% in Jul.
Other inflation data out this week includes the final release of the Eurozone CPI for Aug. Eurozone headline and core inflation is expected to be confirmed at +5.3%. Canadian headline CPI for Aug is expected to accelerate to +3.8% (from +3.3% in Jul) while the monthly pace is expected to slow to +0.2% from +0.6%.
Finally, the prelim S&P PMIs for Sep will provide the first view of growth momentum going into the final month of Q3. Momentum has been slowing among key G4 economies, led especially by services sectors in Europe, the US, and the UK. Weaker manufacturing conditions may be starting to stabilize.
This week, the US Treasury will auction and settle approx. $392bn in ST Bills raising approx. $44bn in new money. The US Treasury will also auction the 10-year TIPS and 20-year Bond this week and both will settle in the following weeks.
QT this week: Approx $2.7bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested. Approx $2.7bn in ST Bills will mature on the Fed balance sheet this week and will be redeemed/roll-off the balance sheet.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
