- A 25bps hike to the Federal Funds Rate target on 14 June 2017 is pretty much a done deal, with money markets pricing in a 99.6% chance that rates will be lifted for the second time this year to 1.00-1.25%. The real question is whether the Fed will maintain its “gradual” hike trajectory, which sees a total of three rate rises per annum in 2017, 2018 and 2019.
- The FOMC will also update its economic projections, which aren’t likely to see any dramatic changes in its forecasts. Incoming data has presented a conundrum, however: the US unemployment rate has fallen to a 16-year low, and is beneath the Fed’s longer-run forecast. But inflation has been easing, and is moving away from target. Growth, meanwhile, is expected to pick up in the quarters ahead after the “transitory” blip in Q1. Ultimately, analysts believe the Fed will look through the Q1 growth weakness and softer inflation.
- The FOMC has signalled its intentions to begin the process of balance sheet normalisation, and in May’s minutes proposed setting a fixed amount that would be allowed to ‘run-off’ from the balance sheet from maturing securities that it holds, with that level being lifted over time – as the levels are raised, reinvestments will decline. But save for the pledge that such normalisation would be conducted in a “gradual and predictable manner”, the logistics remain unclear: when will it begin; what will the ‘cap’ be set at; what size does the Fed want to shrink its balance sheet to, and over what timeframe; how will balance sheet normalisation impact the rate hike trajectory, etc.
- There is no certainty that the Fed will provide fresh guidance on its balance sheet plans this week, though some are on alert for an updated version of the ‘Policy Normalization Principles and Plans’. Additionally, the subject will almost certainly be raised in the post-meeting press conference with Chair Janet Yellen.
An in-depth RANsquawk FOMC meeting preview will be published on Tuesday.
EUROPEAN CENTRAL BANK
- As was widely expected, the ECB tweaked its forward guidance at its June policy meeting (8/Jun), dropping its interest rate easing bias, though it pledged to keep rates at low levels for an ‘extended period’; its assessment of the balance of risks to growth was also upgraded, but it maintained its language that asset purchases could be extended beyond the end of this year if needed. All rates were unchanged, as were the details of the asset purchase programme – again, as expected.
- The updated staff projections saw the central bank’s growth view revised higher over the forecast horizon. However, it slashed its inflation forecasts on the back of food and energy. ECB President Mario Draghi declared that deflationary risks have all but disappeared, and was confident that the inflation profile is becoming more certain and will improve as labour market slack continues to be eroded, though he urged patience.
- Draghi was cautious in his post-meeting press conference and emphasised the subdued outlook for core inflation while reiterating his view that substantial accommodation is still required to boost core inflation. He was also clear that the ECB’s guidance tweaks and forecast adjustments were not the beginning of policy normalisation. Regarding asset purchases, Draghi said tapering had not been discussed, and was sanguine on issues relating to asset scarcity, noting that the ECB could use the programme’s flexibility to address the matter if needed.
- In net terms, there was little market reaction to the ECB’s June meeting: bond yields were a touch lower, EONIA narrowed by around 2bps across the curve. EUR, meanwhile, fell around 25 pips. Markets anticipate the first deposit rate hike (of 10bps) will arrive in the second half of 2018; the consensus also believes that the hike will come only after the asset purchase programme has concluded.
BANK OF JAPAN
- The BOJ is seen keeping its 10-year JGB yield target at 0%, annual asset purchases at JPY 80tln, and interest on excess reserves at -0.10% when it concludes its policy meeting on 16 June.
- The tone of incoming data has firmed – GDP has grown five quarters on the trot (and we can probably expect a sixth), industrial production saw the best monthly print since 2008 in April, exports are encouraging despite the yen strength seen since the end of 2016, and the labour market is tight – suggesting there is a reasonable chance that the Japanese economy will achieve the BOJ’s (optimistic) 2017 growth projection of 1.60%.
- But inflation remains the central bank’s Achilles heel; the erosion of spare capacity isn’t stoking inflationary pressures that would support the central bank in bringing inflation to its 2% target by FY 2018 – core-core inflation was running at a 0% clip in April, with yen strength and fixed business costs being blamed. Economists have recently trimmed their estimate of Japanese core CPI this fiscal year and next, according to a Reuters poll (2017 cut by 0.2ppts to 0.70%, and 2018 cut by the same magnitude to 0.80%), leaving the BOJ with ample scope to continue its largesse. There is also a possibility that the BOJ might trim its inflation forecasts at the July meeting.
- Even so, speculation remains that the BOJ will begin to signal an exit policy. Economists believe the BOJ’s most likely next move is a policy unwind, but most of those surveyed by Reuters don’t foresee normalisation until the second half of 2018. BOJ Governor Haruhiko Kuroda recently said he was sure the central bank would be able to exit policy smoothly when the time comes, though he added there was room to loosen policy further if required.
An in-depth RANsquawk BOJ meeting preview will be published on Thursday.
BANK OF ENGLAND
- Despite the heightened uncertainty after the UK elections, analysts do not see the BOE adjusting policy at the end of its meeting on 15 June 2017, which will probably be a damp squib, with MPC staying in wait-and-see mode until its August meeting when it publishes the next inflation report with updated forecasts (and a presser).
- The MPC is expected to vote 7-1 (unchanged-hike) to keep rates at 0.25% – external member Kristin Forbes is once again likely to be the sole dissenter calling for higher rates at her last policy meeting. Economists surveyed by Reuters expect the Bank Rate to be maintained until at least 2019. Meanwhile, the MPC is seen unanimously voting to keep its stock of asset purchases unchanged at GBP 435bln; the BOE’s corporate bond purchase programme has now concluded after reaching its GBP 10bln capacity, and is not expected to be expanded in June.
- Incoming economic data has been softer: the UK had the lowest rate of growth of EU28 countries in Q1; business surveys have highlighted a loss of momentum; while the labour market remains tight, real wage growth has been hit by higher inflation – brought about by sterling’s post-Brexit drop – which threatens future consumption, and this is being reflected in recent consumer confidence gauges. Apparent catalysts that could drive a significant improvement in the growth outlook are scarce, and against that, the uncertainty around Brexit will remain, weighing on business investment intentions, and there is a risk it may eventually weigh on the labour market too.
- After the May meeting, BOE Governor Mark Carney intimated that market forwards weren’t pricing in very much tightening, but the Governor is unlikely to revisit that argument any time soon (Carney is due to deliver a speech at the annual Mansion House Bankers and Merchants Dinner at 21:00BST on 15 June); the challenges to the growth outlook as well as the political uncertainties should temper his hawkishness – and, indeed, any hawkishness from other BOE officials on the slate to speak over the coming weeks.
- Note: the June MPC will consist of eight members after the departure of Charlotte Hogg. Market participants are expecting the vacancies left by Hogg and Forbes to be addressed, with some speculating that an announcement could be forthcoming alongside the BOE’s Financial Stability Report on 27 June. And on that subject, it is also worth keeping in mind that last July the BOE said the counter-cyclical capital buffer that applies to banks would be held at 0% until at least the June 2017 FSR meeting, and therefore, some anticipate it may be restored back to 0.50% later this month.
An in-depth RANsquawk BOE meeting preview will be published on Wednesday.
SWISS NATIONAL BANK
- The SNB will keep its Sight Deposit Rate at -0.75% and its 3-month Libor target between -1.25% and -0.25% at the conclusion of its meeting on 15 June 2017, analysts predict.
- Swiss economic growth has improved a touch since the SNB’s last meeting in March. However, the pace of growth remains sluggish at 0.3% Q/Q and 1.1% Y/Y, held back by weak consumption, though supported by better investment and net exports. Forward-looking indicators, like the KOF and PMIs, also augur well. Inflation too has benefited from firmer growth and a weaker franc, though still remains fragile – core inflation, for instance, is at the highest levels since January 2015 at just 0.2% Y/Y. The fragile nature is also seen in consumer year-ahead inflation expectations which fell in May.
- The central bank is again likely to reiterate that it stands ready to intervene in the forex market to stem franc strength. After the French Presidential election, European political risk was judged to have diminished (for now), allowing EURCHF to climb higher. However, since mid-May, the euro has not mirrored its rally versus the dollar against the Swiss franc, and subsequently EURCHF has fallen. Chairman Thomas Jordan recently suggested again that the franc remained “significantly overvalued” and the SNB’s negative rates policy and forex intervention were crucial tools in curbing the Swissy’s appreciation.
An in-depth RANsquawk SNB meeting preview will be published on Wednesday.
BANK OF CANADA
- The BOC’s semi-annual Financial System Review noted that vulnerabilities from household indebtedness and housing imbalances have risen over the last six months, and further deterioration on this front would increase the risks of recession; it also pointed out that risks from uninsured mortgages were rising.
- The central bank believes that the buoyant housing market is due to overheating in only some areas, like Vancouver and Toronto, and that any price correction in these areas is unlikely to hit employment or business profitability. Not all analysts agree with the BOC’s sanguine view; Capital Economics believes the BOC was using out-of-date data, rendering its report stale. The consultancy also suggested a significant housing market correction is likely, which will weigh on GDP.
- The FSR removed the risk of prolonged commodity price weakness, and Governor Stephen Poloz repeated his view that the oil price shock adjustment had now abated.
- Elsewhere, the Canadian employment data released on Friday was encouraging – despite the uptick in the jobless rate, which was due to increased participation – and bodes well for Q2 economic growth. But the data is unlikely to be a catalyst that pushes the BOC towards tighter policy, given that hourly earnings remain challenged, as well as other uncertainties around the economic outlook.
RESERVE BANK OF AUSTRALIA
- The RBA held its cash rate steady at 1.50% this week, as was widely expected, and much of the language in the accompanying statement was unchanged.
- Some were expecting the reintroduction of an easing bias after Cyclone Debbie and the wet weather hindered activity earlier in the year. But the RBA looked through the impact attributing it to ‘quarterly variations’. Indeed, the day after the RBA’s meeting, Australian growth in Q1 eased to 1.70% Y/Y, but was a touch above expectations. And activity indicators have been signalling a bounce-back in Q2.
- As HSBC’s RBA Watcher Paul Bloxham noted “the central bank is largely ignoring the volatile, weather-effected GDP numbers and looking at the business and labour market surveys, which still show trend improvement.” Bloxham now predicts that the RBA will keep rates unchanged this year, and raise them in the early part of 2018.
- But with that said, it is worth noting the RBA’s recent comments on low wage growth, which seems set to continue for a while, and how the slowdown in real wages threatens household consumption. As the economy is transitioning away from mining, the consumer sector is more crucial, and if the slowdown in real wages becomes persistent, it may weigh on growth, which in turn might compel the RBA to keep rates at record lows.
RESERVE BANK OF NEW ZEALAND
- New Zealand Q1 growth data released on 14 June is seen firming to 0.70% Q/Q (from the Q4 ‘blip’ of 0.40%), while the Y/Y gauge is seen steady at 2.70%. The RBNZ’s forecasts have pencilled in growth of 0.90% Q/Q in Q1; anything short of that will likely lead to debate about how temporary the Q1 slowdown was, and whether this portends further downside in growth going forward.
- A soft print would also be in contrast to the solid confidence surveys. Analysts at ASB make the point that even growth of 1% over six months is at odds with robust business confidence surveys, adding that the economy is supposed to have seen strong support from population growth, improving export incomes and low rates.
- Anything slightly less than 0.90% Q/Q is unlikely to put the RBNZ in panic mode, but may warrant caution, and it would certainly mean that the central bank would not be hurrying to tighten policy anytime soon. According to a Reuters poll in May, economists do not foresee the RBNZ hiking rates this year, with around half expecting the first hike in the middle of 2018.
- Ahead of the Norges Bank’s meeting on 22 June, CPI eased to a 20-month low, while core inflation eased to 1.60% Y/Y, and now lingers 0.3ppts beneath the central bank’s March forecasts.
- While some argue that this may lead the Norges Bank to trim its inflation forecasts at the June meeting, the NOK has weakened against the dollar since the early part of May, and this will likely exert inflationary pressure in the months ahead.
- This publication of the Regional Network Survey on 13 June will be the last major release the Norges Bank will see before its June meeting.
- Swedish inflation has recently been supported by SEK weakness, as well as oil price base effects. It will soften in May, data released on 13 June is likely to show. The median view looks for CPI Y/Y to fall 0.2ppts to 1.70%, M/M is likely to be flat; for CPIF, the Y/Y gauge is seen easing 0.2ppts to 1.80%, while the M/M measure is also seen flat.
- NOTE: the Riksbank is shifting its inflation focus towards the CPIF measure of inflation, which excludes interest payments. The Riksbank’s most recent forecasts look for CPIF to end 2017 and 2018 at 1.80% Y/Y, hitting the 2% target in 2019.
- Looking ahead, SEB’s analysts see upward pressure to inflation over the summer period bringing inflation above the Riksbank’s target, due new methodologies in calculating travel and holiday prices, but this impact is expected to be temporary. However, a weaker SEK should help contribute on the margin over a 6-9 month period, SEB believes.
(Write to Yogesh Chandarana: Yogesh.Chandarana@RANsquawk.com)