The week just ending had several major events that went off without a hitch. The Bank of England unanimously voted to keep rates on hold, as was widely expected. It now looks as if they’ll wait until after B-day (that’s Brexit Day, or 29 March next year) before hiking rates – the market puts a 25% probability on a rate hike before then, but a 50% probability of a hike at the first meeting following the UK’s departure.
Meanwhile, the European Central Bank (ECB) confirmed its intention to cut back its bond purchases to EUR 15bn a month from the end of September and to stop them entirely at the end of the year. The ECB revised down its growth forecasts slightly, but inflation forecasts remained the same and ECB President Draghi came across as quite positive – he said cost pressures are strengthening due to tighter labor markets and high capacity utilization, while fiscal policies in several countries pose upside risks. The euro firmed as a result, although the likelihood of a rate hike any time soon remains tiny.
The big surprise of the week was a slowdown in US inflation. Both the headline and core inflation rates slowed notably on a year-on-year basis.
Although they both remain above the Fed’s 2% target level, if we annualize the change in prices over the last three months, neither measure is showing the kind of acceleration in inflation that we were seeing in late 2017 or earlier this year. Instead, both seem to be relatively well behaved at around the 2% rate (although bear in mind that that target is for the personal consumption expenditure deflator, not the CPI).
The coming week has less in the way of drama in store for us. There are two major central bank meetings, the Bank of Japan on Wednesday and the Swiss National Bank on Thursday.
The Bank of Japan is really the permafrost of monetary policy. With overnight rates no higher than 0.72% since 1995 (and most of that time around 0%-0.1%), extraordinary monetary policy has been routine for decades. No change is likely any time soon.
At the last BoJ meeting, in July, the BoJ decided to widen the target range for the 10-year Japanese Government Bond (JGB) to ±0.1% from “around zero.” As you can see from the graph below, it’s basically stuck at +0.1% since then. BoJ Governor Haruhiko Kuroda said in his press conference after the meeting that the adjustments were aimed at repairing the damage to market functioning and increasing the sustainability of the BoJ’s policy, but as you can see, the JGB market isn’t really functioning – it just moved to a new level and stuck there. The BoJ said it intends to continue to keep both short- and long-term rates at this extremely low level “for an extended period of time”, but that’s only to be expected, given that they revised down their inflation forecasts.
I think this meeting is likely to change little. Any changes, if at all, would be more likely to come at the October meeting, when the Bank will publish its Financial System Report and the Outlook for Economic Activity and Prices Report, which will contain updated forecasts.
Thursday’s Swiss National Bank (SNB) meeting is likely to be a similar non-event. The SNB is on hold at least until the ECB moves, and will probably wait until well after to allow the overvalued CHF to weaken back towards its purchasing power parity (PPP) value.
For Britain, of course any Brexit news is paramount. There are indications that some breakthrough may be possible on the thorny problem of the Irish border as the two sides analyze trade flows to see if some workaround is possible, but I wouldn’t hold my breath. Meanwhile, UK inflation and retail sales figures are out during the week. After two consecutive months of no change in prices, prices are expected to be up 0.5% mom. Yet this would still result in a slight slowdown in the year-on-year rate of change as prices were up 0.6% mom in August last year. The result would probably tend to confirm that the Bank of England can afford to wait to raise rates again to see how Brexit develops, and could be negative for the pound.
Finally, on Friday we get the preliminary purchasing managers’ indices (PMI) for September for Japan, France, Germany, the EU as a whole, and the US, although of course nobody pays attention to the Japan PMIs. The PMIs have been clustering in the fourth quadrant, showing a slowdown in the pace of expansion. However, fewer countries’ PMI fell in August than has been the case recently, and it’s noticeable that the ASEAN countries, which would normally be among the first to be hit by problems in international trade, aren’t showing any particular weakness.
The EU-wide manufacturing PMI is expected to be unchanged while the US manufacturing PMI is expected to rise notably. That could provide a modicum of strength for the dollar on Friday.
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