• The abundance of Fedspeak last week did little to persuade the market to shift towards the FOMC’s hiking trajectory – which has pencilled in seven additional 25bps hikes through the end of 2019; Fed Funds Futures, on the other hand, see just two more hikes over that horizon.
• An acceptance of the need to be patient was generally evident in the tone of the 2017 voters who spoke about monetary policy last week: while NY Fed’s William Dudley suggested that halting the tightening cycle might imperil the economy, Chicago Fed’s Charles Evans thought it prudent to ‘wait and see’, a sentiment echoed by the Dallas Fed’s Robert Kaplan as well as the usually hawkish Philadelphia Fed President Patrick Harker.
• Evans and Kaplan’s concerns stem from inflation (specifically, the apparent lack of it). Kaplan was sanguine, and believes that inflationary pressures will pick-up as labour market slack is eroded – which was also Dudley’s core argument. Evans, however, was more scathing, arguing that low inflation was a serious policy mess, and he expressed nervousness about the recent soft inflation data and the challenges about bringing up towards the Fed’s 2% target.
• “There is a growing rift among Fed policymakers,” write analysts at Jefferies. The bank notes that following the June FOMC rate decision “there have been public grumblings from a growing number of Fed officials who are becoming uncomfortable with the behaviour of the recent inflation data,” adding “predictably, policymakers with dovish inclinations have been outspoken. Yellen is finding herself in a new role as a hawk.” May’s PCE data, released this coming Friday, will be key for influencing the debate. The core measure is seen ticking down by 0.1ppt to 1.4%, and crucially, away from the FOMC end-2017 forecast of 1.7%.
• Morgan Stanley’s analysts point out that since the beginning of the year, US inflation expectations have fallen by the most in the G10 economies, with 10-year breakeven rates down by around 40bps, which subsequently pushed the 2s10s spread to the narrowest since end of 2007. And this curve-flattening – also evident in other curve spreads – has not gone unnoticed by Fed officials. Kaplan suggested that the Fed be cautious about hiking rates further with 10-year yields around these levels, arguing that it was indicative of the market’s sluggish view on future growth. Dudley was having none of it, however, attributing it to low overseas inflation, once again, highlighting the divergence of opinion among 2017 voters.
• Balance sheet normalisation, however, is one area where the Fed seems more unified in their endeavours to kick-start the process in 2017. The St Louis Fed President James Bullard said the Fed could announce the start in September, and even identified the ‘low $2 trillion’ level as an appropriate for the long-term size of the balance sheet (from the current $4.5 trillion mark, and for reference, versus around $900 million in Q3 2008). But once again, the link to inflation may prove the guiding factor: Kaplan said balance sheet reduction may have a ‘muting’ effect on inflation, and he was uncertain as to exactly how much. Expect more commentary around this theme in the weeks ahead.
BANK OF ENGLAND
• The BOE’s June policy meeting – where three of the current eight MPC members dissented – signals a clear rift has emerged between the hawks and the doves, and last week’s BOE-speak hints that the split on the rate-setting committee may be deeper than the vote implied.
• Governor Mark Carney’s delayed remarks to business leaders at the Mansion House on Tuesday struck a distinctly dovish tone, seemingly putting the dissenting external members of the MPC in their places when he said it is “not yet the time” to begin raising rates, citing consumer spending and business investment; rates, Carney argued, were appropriate, given the “anaemic” levels of wage growth, the generally subdued inflation, and he prefers to evaluate incoming information on how the UK economy would react to the prospective tightening in financial conditions amid the uncertainties of Brexit.
• The very next day, BOE chief economist Andy Haldane revealed that he expects to vote for a rate hike in the second half of 2017. An IFR analysis noted that Haldane’s shift was important for three reasons: he has previously leaned towards the dovish side of the scale, he is charged with the MPC’s forecasts, and he is an internal member of the MPC (whereas June’s dissenters were all external).
• UBS makes a crucial point that should not be glossed over: Haldane’s speech listed key reasons why a hike might not be appropriate, including weak wage growth and the possibility that the Brexit process is not smooth – which may also involve a negative response by consumers and businesses. Ultimately, however, Haldane said the improving global growth outlook, lower global political uncertainty, as well as some signs that downside risks to inflation have eased leading him to conclude that “the balance of risks associated with tightening too early, on the one hand, and too late, on the other, has swung materially towards the latter in the past six to nine months.”
• Haldane’s expected vote to tighten policy, therefore, will likely be based on the tone incoming data, particularly, those relating to wage growth and inflation, as well as business investment and sentiment. Additionally, Haldane seemed to intimate that when the Bank does begin normalising policy, only “a partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon”.
• On Tuesday, the BOE will publish its latest financial stability report. At last July’s FSR update, 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% on Tuesday.
EUROPEAN CENTRAL BANK
• The conversation continues to move towards tighter policy. The latest ECB sources story suggested that the scarcity of German bunds would make any extension of QE difficult, given that the eligible stock of German debt available for ECB QE will be exhausted by the middle of next year, Reuters reported citing three sources. This problem is also likely to play a key role in determining whether the central bank extends asset purchases or tapers them when the current programme comes to its conclusion in December.
• ECB President Mario Draghi was quizzed on this issue at the ECB’s June press conference, but he argued that the asset purchase programme was running smoothly, and “when and if” the ECB faces problems it will “use the flexibility that the programme itself embodies”.
• But tighter talk is still the name of the game at the ECB: last week the ECB’s chief economist Peter Praet hinted that price pressures will begin to firm “sooner or later, and that will help to bring about a change in monetary policy”. And this weekend, arch-hawk Jens Weidmann said the ECB had not discussed an extension of QE, and if the economy continues to evolve as expected, the time may be approaching for the central bank to exit stimulus.
• There will be a lot more ECB-speak this week, as the fourth annual ECB Forum on Central Banking will take place in Sintra. The focus will be on investment and growth, and all the big guns will be on display: Mario Draghi, Benoit Coeure, Peter Praet, Yves Mersch, Vitor Constancio, as well as other central banking titans like BOE governor Mark Carney, BOJ governor Haruhiko Kuroda, and BOC governor Stephen Poloz. Full schedule of speakers is available here.
SWISS NATIONAL BANK
• While fractures along the hawk/dove lines are beginning to appear at some of the G10’s major central banks, the SNB is unified with all its speakers singing from the same hymn sheet. You can almost guess the exact points that will be made in their speeches. This week, it was board member Andrea Maechler’s turn to lead the choruses.
• Maechler echoed Chairman Thomas Jordan and board member Fritz Zurbrugg’s recent comments that the franc remains highly overvalued, and warned that the SNB has the ability to intervene in forex markets should it be deemed necessary. She also said SNB will pursue loose policy for the foreseeable future in order to boost price pressures. Nothing new to see here at all.
BANK OF JAPAN
• The BOJ continues to rattle-off its usual buzzwords and catchphrases, and there wasn’t anything particularly new in this week’s commentary: Governor Haruhiko Kuroda again says the economy is on a firmer footing, prices are beginning to pick up pace, but continued easing is appropriate since inflation remains quite distant from target.
• Deputy Governor Kikuo Iwata’s comments were more sober, noting the lack of momentum in inflation, and risks on prices are skewed to the downside, reiterating the need for activist policy, and leaning against calls for tightening.
• Iwata also suggested that removing the bond-buying programme would cause unnecessary market turmoil, and if Japan’s economy worsened, the BOJ could ramp up stimulus – these comments were more interesting, particularly as the commentariat talks up an exit from stimulus.
• May CPI data released this week will be in focus. The consensus view looks for a small rebound. Analysts at Nomura believe “the rise in import prices due to JPY depreciation through end- 2016 has started to have an impact on the core-core inflation rate,” adding, however, that “the rise in the core-core inflation rate in May was sharp, and in June we expect the boost from JPY depreciation to end.” Meanwhile, May’s retail sales are likely to get a boost from base-effects and low fuel prices.
BANK OF CANADA
• Canadian CPI data released last week missed expectations, with energy prices dragging on the headline. But even core CPI missed expectations, leaving the inflation data at odds with the recent hawkish chatter from BOC Governor Stephen Poloz and Deputy Governor Carolynn Wilkins.
• Admittedly, in her now infamous speech on 12 June, Wilkins did suggest that slack within the economy is contributing towards below-target inflation, and that headline inflation has been dragged lower by some transitory factors. Nevertheless, some have noted that if June’s inflation print comes in line with expectations, then the BOC is still likely to miss the 1.7% Y/Y CPI level that it forecast in the April Monetary Policy Report.
• This week’s docket has three BOC speeches listed, though analysts at Scotiabank point out “we don’t know the topics for two of the BOC events and an air of secrecy may surround the contents of the third talk”. BOC Deputy Governor Lawrence Schembri speaks under Chatham House rules to a group of economists on Monday, and Scotia says “if he communicates a material point regarding the BoC’s bias then street chatter may light up and with that the risk of miscommunication”. Poloz will speak on Tuesday at a Central Banking conference hosted by the ECB, and Deputy Governor Lynn Patterson will speak later in the day at another event – the last scheduled BOC speech before the July policy meeting.
• Additionally, on Friday, April’s GDP data will be released, and Bay Street looks for 0.2% M/M (versus the prior 0.5% M/M). Manufacturing and utilities supported gains in March, but are seen flat in April according to RBC, and fire-related shutdowns are likely to weigh on non-conventional oil extraction, which may pull-down the headline. Support is seen coming from the consumer sector. RBC says “the BOC’s hawkish shift is supported by an average of 3.5% annualized growth the last three quarters, with a strong April outcome incrementally adding to this trend”.
• Also on Friday, the Business Outlook Survey will offer clues on how the BOC will lean at its July policy meeting. “We think preliminary results from the survey were likely available ahead of the recent speech and may have contributed to the [BOC’s recent] upbeat tone,” RBS says. Pay attention to the inflation expectations gauges, as well as commentary around exports.
RESERVE BANK OF AUSTRALIA
• Nothing particularly game-changing stood out in the RBA’s latest meeting minutes. The bias remains neutral while policy remains accommodative, and the central bank was happy to look through the recent weakness in growth, while it is keeping an eye on the housing market and labour market, which some have noted, is firming.
• “Overall, the Minutes remained upbeat on both global and domestic conditions, highlighted an improvement in the labour market, a better capex backdrop and a stabilisation in wage growth,” Goldman Sachs’ analysts said.
• Comments from Governor Philip Lowe reiterated the message. Lowe is upbeat on the global recovery, he is also encouraged by the improvement in business conditions domestically, as well as the prospects for the economy going forward. The RBA’s Deputy Governor Guy Debelle is on the slate this week.
RESERVE BANK OF NEW ZEALAND
• The RBNZ held rates at 1.75%, as was widely expected, and once again reiterated that policy will remain accommodative for a “considerable period”.
• There were two additions to the post-meeting statement, however. The central bank noted that the NZD had strengthened, and additionally, it noted that growth – which had surprised to the downside for the second consecutive quarter in Q1 – missed its expectations. But crucially, the RBNZ said that the outlook for growth “remains positive”, supported by “accommodative monetary policy, strong population growth, and high terms of trade,” and “recent changes announced in Budget 2017 should support the outlook for growth”. The positive characterisation was not quite as dovish as some had foreseen.
• “Overall, the RBNZ’s view does not appear to have shifted,” says HSBC. “The central bank still sees generally weak inflationary pressures in the economy, with inflation and wage growth increasing only ‘gradually’. Clearly the central bank sees no need to tweak its monetary policy settings any time soon,” and accordingly, HSBC sees the inflation risks as tilted towards the upside on the back of the firmer growth outlook.
• The Norges Bank kept its key rate at 0.50%, as expected. The minutes – published for the first time – showed the decision was unanimous.
• But the bulk of attention was on its forward guidance, where it dropped its easing bias, now seeing rates remaining at current levels through 2018, before an eventual rate rise in the early part of 2019. Markets, however, are pricing in the hike will come in Q4 2019. Some analysts have suggested that, given the Norges Bank is cognizant of financial stability risks (“persistently low interest rates lead to financial system vulnerabilities”), there remains a risk that rates may be raised more quickly than anticipated to stem any bubbles in the housing sector, though the raising of bank’s countercyclical buffers and more activist macroprudential policy may mitigate the need for rate hikes.
• Its updated forecasts so the estimate of the output gap revised up. However, the inflation profile was lowered, perhaps unsurprisingly given the slowdown this year. But with that said, its medium-term view was raised on the back of stronger-than-expected growth.
• “Norges Bank’s main message is still that it is on hold for a very long period with inflation well below target and capacity utilization below normal for most of the forecast period,” write analysts at Nordea. “But the central bank now sees the possibility for it to be surprised on the downside to be less than it did in March,” largely due to signs of higher capacity utilization as well as the weaker NOK.
• The Economic Tendency Indicator released last week signals growth is broad-based, and will strengthen in the months ahead. It also suggests that inflation and wages will firm.
• The consumer sentiment data stood out, however, falling to lows seen last September, despite households’ assessment that their financial situation had improved. “It is unclear why consumers became less optimistic about the economy in June,” says Capital Economics. “Data released Tuesday revealed that the labour market is very strong, while Swedish equities have performed well in recent months.”
• This week’s release of retail sales data may offer a further glimpse into consumer behaviour, and analysts are expecting a rise of 0.3% M/M.
• Capital Economics believes that the ETI is consistent with 6% growth, though it notes that the survey can overstate the strength in growth. Nevertheless, CapEco sees the boost in growth translating into a rise in inflation towards the Riksbank’s 2% target. The central bank next policy decision is scheduled for 4 July, and is not expected to alter policy before its current QE programme concludes in December; “But not long after that, probably in April 2018, we expect the Riksbank to begin raising the repo rate,” CapEco says.
Write to Yogesh Chandarana (Yogesh.Chandarana@RANsquawk.com)