WEEK IN FOCUS: Fed & BoJ Set To Convene, With Eyes On German & NZ Elections
Key Events: –
Tuesday: RBA Meeting Minutes
Wednesday: FOMC Monetary Policy Decision, UK Retail Sales (Aug)
Thursday: BoJ MonPol Decision, New Zealand GDP (Q2), Norges Bank MonPol Decision
Friday: Canadian CPI (Aug)
North America: –
The US Federal Reserve will issue its latest monetary policy decision on Wednesday, with all of those surveyed by Reuters looking for the FOMC to leave its Federal Funds Target range unchanged at 1.00 to 1.25%. The FOMC is, however, expected to announce its plans to begin reducing its balance sheet, with the market expecting the Fed to begin implementing its plans in October. Additionally, markets will be keeping an eye out on the FOMC’s updated economic projections, as well as the post-meeting press conference with Chair Janet Yellen. “In our view, the Fed has two goals for its September meeting this week: announce it will begin balance sheet normalization, as described in the June 2017, and assess how much the underlying trend rate of unemployment has slowed,” analysts at Barclays write. In June the FOMC suggested a plan where it will allow USD 6bln of maturing Treasuries and USD 4bln of maturing MBS to roll-off per month for a three-month period; that amount would then be raised to USD 12bln for Treasuries and USD 8bln for MBS for another three months, and after a year, redemptions would be capped at USD 30bln for Treasuries and USD 20bln for MBS per month. “An announcement on balance sheet normalization appears to be a foregone conclusion based on Fed communications,” Barclays writes, and the bank expects the eventual “normal” size of the balance sheet to reach the USD 3tln mark in three years (from around USD 4.5tln currently). The FOMC’s updated projections will also come under scrutiny. The central bank suggested that the slowdown in inflation was ‘transient,’ and the most recent batch of CPI data exhibited an uptick in both core and headline inflation. However, the Fed’s June forecasts are still more optimistic than the market’s consensus, so it will be interesting to see how the Fed addresses the current discrepancy. “We do not believe the committee will reach consensus on the extent to which slower inflation is transitory and, in turn, how much ‘patience’ is needed before proceeding with further policy rate normalization,” Barclays says. It is also worth noting that FOMC communique on further rate hikes has turned more cautious in recent weeks, and markets are now pricing a 50/50 chance of a further 25bps hike before the end of 2017.
Canada’s August CPI reading will cross on Friday, with analysts looking for a headline reading of 1.5% YY against a prior 1.2%. RBC are in line with consensus and expect about half of the rise “coming from a ~3% increase in gasoline prices. The remainder is partially a reflection of the eroding of excess capacity having some (limited) follow-through into consumer prices.” The average of the BoC’s three core measures stood at just under 1.5% in July CPI (Aug), although that did not stop the BoC from delivering a 25bps hike for a second consecutive meeting, as the central bank noted that inflation had “evolved largely as expected.” Friday also brings the release of Canada’s July retail sales data. Analysts expect a headline reading of 0.2% MM against a prior 0.1%. RBC are above consensus and “expect nominal retail sales to rise 0.5% m/m in July, though this is largely due to gasoline prices increasing ~3.5% in the month. Excluding that – and a 0.5% projected increase in auto sales – we see core sales only 0.1% higher, which should be matched by the overall volumes gain. Given that retail volumes have risen at least 8% annualized in each of the last three quarters, even a decline in July would not seriously dent the overall story, though it would be a signal of an (expected) slowdown in household consumption growth in Q3.”
Other releases of note during the week: Tuesday US Building Permits (Aug) US Housing Starts (Aug) US Current Account (Q2) US Export & Import Prices (Aug) Canadian Manufacturing Sales (Jul) Wednesday US Existing Home Sales (Aug) Thursday US Phillidelphia Fed Manufacturing Survey (Sep) Canadian Wholesale Sales (Jul) US House Price Index (Jul) Friday US Markit Manufacturing, Services & Composite PMIs (Sep, P)
Monday will bring the release of the single Eurozone’s final CPI print for August, with analysts looking for the headline 1.5% YY and core 1.2% YY flash readings to be confirmed. Focus will then switch to Germany’s ZEW survey on Tuesday, with the current conditions metric expected to come in at 86.9 from 89.7, while economic sentiment is expected to tick up to 12.7 from a prior 10.0. The final release of note will come in the form of IHS Markit’s flash September PMI readings from the Eurozone. Consensus looks for the manufacturing survey to come in at 57.2 from 57.4, services is seen at 53.8 from 53.5 and the composite is seen at 55.6 from 55.7 last time out. In the wake of August’s survey IHS Markit noted that “the summer months have seen eurozone economic growth moderate only slightly from the rapid pace seen in the spring. The solid PMI readings for July and August set the scene for another strong GDP number for the third quarter, with the surveys running at a level historically consistent with 0.6% growth. “With such robust growth being sustained into August, the region is on course to see GDP rise by 2.1% in 2017, which would represent the best performance since 2007.” Last month’s new orders sub-index remained above 55, and RBC believe that this could result in “the September composite remaining elevated; however, this month’s reading is unlikely to materially shift the message on Q3 growth.” Politics also remains at the fore, and eyes will of course be on the German Federal Election, with voting due to be held on Sunday 24th September.
The Norges Bank is due to issue its latest monetary policy decision on Thursday. All of those surveyed by Reuters expect the central bank to stand pat. Goldman Sachs expect the Bank to reiterate that it expects its key rate to remain unchanged in the period ahead, as “GDP growth printed slightly higher than what was expected by the Norges Bank.” Back in June, the Norges Bank said they didn’t expect a hike until late 2019. Nordea note that there hasn’t been any major surprises since that forecast and so the rate path will likely indicate rates on hold for a very long period. However, they do suggest that there are arguments for an earlier hike than is currently forecast as “the labour market is stronger than expected and mainland demand, especially consumption, has been on the upside.” On the other hand, the most recent inflation print disappointed, although volatile food prices were the main driver.
Other releases of note during the week: Wednesday German PPI (Aug)
The most notable release on the UK docket will cross on Wednesday and comes in the form of August’s retail sales dataset, analysts expect the headline metric to print at 0.2% MM against the 0.3% seen in July, while the core print is expected to slow to 0.1% MM against a prior reading of 0.5%. HSBC warn that “although consumer confidence picked up a touch in August, we expect these retail sales moves to go into reverse, with fuel sales rising but most other goods seeing volumes fall, as colder weather and still squeezed real incomes weigh on consumption.” The release will come under increased scrutiny following the pop in UK inflation during August and after the BoE changed tact at its most recent meeting. The BoE’s change in rhetoric (the key passage being that “a majority of the MPC judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflation pressure then, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainability to target.” Although the Bank did highlight that “any increases in the bank rate are expected to be at a gradual pace and to a limited extent.”) has led to markets pricing in a circa 75% chance of a hike by the end of 2017 (at the time of writing). The move was compounded when noted BoE dove Gertjan Vlieghe opining that “appropriate time for a hike might be as early as the coming months,” although he noted that his “conditions for hike are fall in slack, rising pay pressures and household spending, and robust global growth.” It is worth noting that survey based retail sales data from the BRC and CBI has been mixed. BofA Merrill Lynch see the risks for the release as “skewed to the downside.”
UK PM May is set to deliver a key Brexit speech from Florence on Friday and the focus of the address is likely to be on the UK’s future relationship with the EU, as opposed to the financial settlement (‘Brexit Bill’)associated with the UK’s exit from the EU.
Other releases of note during the week: Thursday UK Public Finance Data (Aug)
The BoJ is likely to leave its monetary policy settings unchanged when it convenes on Thursday. “Even though the economy has expanded for six straight quarters, inflation is well short of the 2% target and the absence of wage increases suggests that the strong economic growth is being lost somewhere in the transmission process,” say analysts at HSBC. Some have noted that the BoJ has tapered the pace of its bond buying programme, but HSBC doesn’t believe this hinders the central bank in its ability to keep 10-yield around 0%, nor its extremely loose policy stance. While other major global central banks are embarking on efforts to normalise policy, it may be far too early for the BoJ to seriously debate removal of the proverbial punch bowl. Analysts at Moody’s do not expect the central bank to err towards normalisation, nor abandon its yield-curve control policy until inflation and inflation expectations “permanently rise above 2%.” The BoJ estimates that its inflation goal will be met in 2019.
The RBA will deliver the minutes from its latest monetary policy decision on Tuesday. The minutes are expected to highlight the familiar themes rather than reveal any new insight after the central bank left its cash rate on hold at 1.50%, as expected. Its language on the AUD was also maintained. On the labour market, the RBA was more upbeat, a view that has clearly been vindicated by the latest labour market report. The RBA is of the view that wage growth will pick up, though the central bank did retain its language about how the low rate of wage growth is likely to continue for a while. HSBC believes that “the RBA seems to be in a holding pattern, waiting for evidence of a lift in inflation and wages growth before considering hikes.”
Thursday will see the release of New Zealand’s Q2 GDP data. Consensus points to growth accelerating to 0.8% QQ from the 0.5% seen in Q1, although that would be below the RBNZ’s forecast of 0.9%. Westpac suggest that “in part, the expected firmness in Q2 reflects a rebound from the temporary earlier softness in the agricultural and transport sectors. Moreover, firmer retail spending in Q2 underpinned by strong population growth and tourism is expected to lend a boost to GDP growth. Balanced against these upside factors, we are seeing signs of softness within the construction and manufacturing sectors.” While ASB caution that “despite a strong demand backdrop, the economy may be running into capacity constraints and the economic expansion remains patchy.” Focus will also be on New Zealand’s general election, with voting due to take place on Saturday 23rd September.
Other releases of note during the week: Monday Chinese House Prices (Aug) Tuesday New Zealand Westpac Consumer Sentiment (Q3) Australia House Price Index (Q2) Wednesday New Zealand Current Account (Q2) Japan Trade Balance (Aug)