UPCOMING EVENTS:

• Tuesday: RBA Meeting Minutes, Canadian CPI
• Wednesday: FOMC Meeting, UK CPI
• Thursday: Australia BoE Announcement
• Friday: BoJ Meeting

Tuesday

RBA Meeting Minutes:

The Reserve Bank of Australia (RBA) kept its rates steady at 4.10% during its September 5th meeting, which also marked Governor Lowe’s last meeting. The bank’s official statement maintained its previous stance, emphasizing the possibility of future monetary policy adjustments to get inflation back on target. The RBA acknowledged the effectiveness of higher interest rates in balancing the economy’s supply and demand. However, they also expressed concerns about enduring high inflation. The RBA is taking a pause to gauge the repercussions of previous rate hikes and is cautious about uncertainties in the Chinese economy, particularly in its property sector, and the unpredictable future of household spending. The upcoming minutes from this meeting aren’t expected to reveal any significant surprises, especially given the leadership change at the RBA. Additionally, RBA analyst McCrann predicts no upcoming rate hikes or cuts.

Canadian CPI:

Inflation rates are currently at 3.3% Y/Y for the headline and 3.2% Y/Y for the core. Experts are keen to see if there’s a decrease in inflation trends. The Bank of Canada’s (BoC) head, Macklem, expressed concerns about the persistent high inflation and the lack of significant reduction in basic consumer prices. He emphasized the need for the bank to consistently address the issue. Macklem warned that delaying action would only make managing the situation harder. He anticipates a short-term rise in headline inflation before it starts declining. On the policy front, Macklem mentioned that once inflation reaches 2%, interest rates will likely decrease, but we haven’t reached that point.

Wednesday

FOMC Meeting:

The FOMC is predicted to maintain interest rates at 5.25-5.50% in their upcoming Wednesday meeting, as per market expectations. Investors are eager to see if the central bank’s updated economic projections still anticipate another rate hike in 2023, as previously indicated. Despite current market signals suggesting that we might be at the peak interest rate level, there’s a 50% probability of another rate hike in 2023. Moreover, expectations are leaning towards potential rate reductions in 2024, with projections indicating a possible cut by July 2024, if not June. However, Federal Reserve officials are downplaying these predictions, implying that rates might stay consistent for a while to achieve their price growth objectives.

UK CPI:

For August, the headline inflation is projected to rise to 7.0% from 6.8%, while the core is anticipated to drop slightly to 6.8% from 6.9%. This predicted increase is due to inflationary pressures related to energy, observed in both the Eurozone and the US. However, some countries have not experienced this rise. It’s uncertain how persistent these changes will be and their potential effect on key core rates. Notably, the previous report highlighted a decrease in Y/Y CPI to 6.8% from 7.9%, consistent core figures at 6.9%, and an increase in all services to 7.4% from 7.2%, influenced by rising rents—a trend ING believes won’t continue. The upcoming inflation data is crucial, not necessarily for this month’s anticipated rate hike (which has a 75% chance of happening), but for future decisions. Markets suggest a 40% probability of additional rate increases after September, presuming a 25bp increase occurs. However, if August’s inflation data is surprisingly low, the BoE might reconsider and keep the rates stable, especially considering recent comments from officials like Pill and the latest wage statistics.

Thursday

BoE Meeting:

Out of 65 economists surveyed by Reuters, 64 predict that the BoE will raise the Bank Rate by 25bps to 5.5%. Markets also give this a 75% likelihood. Key recent data includes:

-> July’s year-on-year (Y/Y) Consumer Price Index (CPI) declined to 6.8% from 7.9%, with the core inflation stable at 6.9% and the services sector moving up to 7.4% from 7.2%.

-> June’s monthly GDP growth exceeded expectations at 0.5% compared to the forecasted 0.2%. Contrastingly, July witnessed a 0.5% drop, marking the first month since June 2022 where all major sectors reported a decrease.

-> August’s composite Purchasing Managers’ Index (PMI) declined to 48.6 from 50.8, with the critical services component slipping to 49.5 from 51.5.

-> In the job market, the unemployment rate for the three months leading up to July edged up to 4.3% from 4.2%. Headline wage growth for the same period increased to 8.5% from 8.4%, influenced by one-time payments to the NHS and Civil Service in June and July 2023.

Given the high inflation and wage figures, it appears likely the BoE will implement another rate hike. As for the future, the market is split on further tightening. Governor Bailey recently highlighted the uncertainty around rate hikes, suggesting the BoE will emphasize data-driven decisions and hinting at further tightening measures to come.

Friday

BoJ Meeting:

The Bank of Japan (BoJ) is heading into its upcoming two-day policy meeting with expectations of maintaining the current monetary stance. Specifically, experts predict the BoJ will hold the Bank Rate steady at -0.10%. In a recent move, the bank had shaken up the market by introducing a more flexible approach to its Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC). This entailed guiding the YCC through its fixed-rate operations for 10-year Japanese government bonds at 1.0%, while broadening the purchase amounts’ range.

While this July adjustment caused ripples in the Japanese currency market, the yen stabilized and ultimately weakened. The BoJ clarified that this strategy adjustment aimed at ensuring seamless monetary easing rather than hinting at a departure from their longstanding ultra-loose monetary policy. This emphasis on adaptability in the YCC strategy signals that any immediate, drastic policy shifts are improbable. The prevailing sentiment among economists is that the BoJ will adhere to this policy framework for the remainder of the year.

Interestingly, even though some voices within the BoJ have started pointing to early signs of nearing their 2% inflation target, there’s a consensus that the stable achievement of this goal is still on the horizon. Adding another layer of complexity to market predictions, there’s increasing speculation about the BoJ’s potential move away from negative interest rates by early next year. This shift in market sentiment, moving from September to January of the next year, finds its roots in remarks from BoJ Governor Ueda. He’s hinted at the possibility of collecting enough data by year’s end to contemplate ending negative rates. Nevertheless, while Ueda leans towards a discreet policy shift, or a “quiet exit” as he terms it, he remains committed to the need for an ultra-easy policy stance in the immediate future.

Author: Jacky.T

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