Week Ahead: Central Bank Feast
After the pyrotechnics of the ECB meeting last week, we have a plethora of central meetings this week with the US Fed taking centre stage, in amongst Bank of England, Bank of Japan, Swiss National Bank and Norges Bank meetings.
The two-day FOMC meeting concludes on Wednesday evening when the policy statement and fresh new Summary of Economic Projections will be released, followed by Chair Powell’s press conference. A quarter point reduction in rates, the second consecutive cut in the current easing cycle, is fully priced in by markets with a half point cut now highly unlikely. At the start of this month, markets were pricing about five more rate cuts by the end of 2020 but fed fund futures now have three cuts priced including this week’s forecast cut.
Expectations are for the Fed to continue to signal its intention to ‘act as appropriate to sustain the expansion’, and this means more rate cuts will follow if and only if the outlook deteriorates. Chair Powell is also likely to continue to describe the economy as being on solid foundations while steering clear of President Trump’s trade policies and criticisms.
All the action is likely to take place around the growth and inflation forecasts and then the verbal guidance of Chair Powellin the press conference. Interesting here will be any material changes to the growth forecast revisions. Also, whether inflation remains on track to return to target within the projected horizon as the June projections for core PCE are in the ballpark of consensus expectations.
The Bank of England remains in limboland with a combination of a tight labour market, higher wage growth, Brexit and trade war uncertainties and slowing global growth. No changes in policy are expected although we note that the BoE maintained its gradual and limited (as well as Brexit dependent) tightening bias as its August meeting. Ahead of the bank’s decision, inflation data and retail sales figures will be released that are forecast to show moderate inflationary pressure and weaker consumer spending.
The chances of a 'no-deal' Brexit have receded and a meeting between PM Johnson and EU Commission President Juncker on Monday, their first tête-à-tête since Johnson became PM in July, will grab the headlines. Parliament is currently ‘prorogued’ with no election yet called. This may change on Tuesday when the Supreme Court starts its hearing on whether prorogation was unlawful or not. This shouldn’t affect the Brexit outcome but will cause a lot of political noise.
The Swiss National Bank has kept the policy rate of -0.75pct unchanged since the end of 2014. However, this is in danger of following the ECB’s further into negative territory which would keep the CHF from appreciating too much. It has been a strong year for the ‘swissie’ as investors have flocked to safe havens in spite of SNB intervention in FX markets to dampen the appreciation.
Finally, no changes are expected at the Bank of Japan meeting on Thursday, but the October VAT hike and the global slowdown are threatening a return to policy action. That said, the long-term adverse effects of QE are becoming more concerning, with Governor Kuroda recently stating that long-term yields ‘have fallen a bit too far’.