The Morning Hark - 18 Sep 2022
Today’s focus ……The Week Ahead
As we highlighted on Friday as a mark of respect for the Queen’s State Funeral there will be no Morning Hark published tomorrow. However, we publish below our look ahead to the coming week and we shall be back as usual on Tuesday morning.
The Week Ahead
FOMC rate decision. 75 or 100bps? Post the hot CPI data the spectre of a 100bp hike has risen considerably peaking around a 40% chance in the middle of last week. That expectation has since subsided somewhat to a 20% with an 80% chance of a 75bp hike. The reasoning behind the calls for 100 are fairly apparent with the stubborn inflationary backdrop with hopes of a peak in July firmly dispelled by the August print along with the persistent strength of the labour market. Furthermore a 100bp hike shows the market the Fed is not for turning and they will not stop until the pain trade exhausts inflation. However as we have said before the service side of the economy is fuelling inflation at present and in particular rents which is a hard sector to control short of capping rents or building new homes. Neither of which are an easy thing to implement in the short term. 75bps with a hawkish tilt for the remaining meetings, on a data dependent basis, seems a more plausible approach from our point of view. The China slowdown story becomes ever more prominent, the strong dollar took a breather but is now back on track again, the energy crisis in Europe and the ever growing strains on the US housing market all give the Fed food for thought in their deliberation. Probably more stark is the fragility of the equity markets which saw their biggest weekly percentage decline in three months last week and despite the Fed saying they want to inflict pain there’s a difference between inflicting pain and inflicting a full blown crash. The fragility of the market, despite what the Fed may say, is still a concern and with all the other issues that the world is facing a full blown crash is not one to add to the list. We side with 75bps and potentially the same again in November if the data warrants it. In addition to the announcement we shall get an update of their economic projections. We’d expect growth projections to be revised downwards with the inflation side of the debate still showing a stickiness. Market focus will also be drawn to the year end and the terminal rate for Fed Funds. The “Dot Plan” is expected to show increases in the pair to around the 4% and 5% respectively (up from 3.4% and 3.8% previously). Again this shows a disconnect with the market which still anticipates rate cuts next year on the basis that the higher and faster you raise the quicker you have to cut. Rounding off we have of course Chair Powell’s press conference. In case he doesn’t get his message over he has a chance to “redirect” markets with a speech on Friday.
BoE and a mini-budget. Busy week ahead for the UK although it starts with a moment for reflection on Monday for The Queen’s State Funeral. Later in the week the BoE rate decision on Thursday and on Friday the new chancellor Kwarteng announces a mini-budget to tackle the UK’s cost of living crisis. The BoE is anticipated to raise rates by 50bps although there is still a lingering thought that 75bps may be more appropriate. The wind has been taken out of the sails of the hawks with the announcement of the government’s energy price cap which is commonly believed to shave a few percentage points off the near term CPI prints. However the medium term outlook for inflation, with such a “handout”, remains at risk but the urgency, for now, to act aggressively has been dissipated and hence we think they’ll go for a 50bp hike. Given their announcement comes the day after the Fed there is a possibility that if the Fed “go large” the BoE will follow suit with a larger hike but neither are base case for now. Further hikes are expected in the last two meeting of the year to get rates to 3% by year end. Also worth noting there will be an announcement on the confirmation vote for the Gilts sale programme as part of the Bank’s QT measures. The mini-budget comes the day after as the new chancellor presents his proposal to counter the cost of living crisis. Initial thoughts have centred on; a reversal of the National Insurance increase which came into effect earlier this year, to not proceed with the corporation tax rise proposed for next April, other measures which are touted are business rate cuts, a potential reduction in VAT as well as bringing forward the pledged income tax cut of 1% promised by his predecessor. These measures are on top of the emergency energy bailout package which is capping household energy bills for 2 years bringing the overall cost to around £170bn. How this is paid for is going to be interesting; loans? Gilt sales? Or a combination of the two? Given the BoE will be embarking on their sale of Gilts in the near future could be interesting to see who gets to market first for a bit of front running!
BoJ rate announcement. These meetings have lost their shine of late compared to the frenzy around the early summer meetings when there was much speculation as to whether the bank would abandon their Yield Curve Control policy. Those seem distant memories and we expect the bank to reaffirm its commitment to the policy and keep rates unchanged. Upward revisions to q2 GDP, CPI inching its way higher, albeit from a very low base, and a depreciating JPY are not expected to make the BoJ alter their stance. Recent chat from officials from the BoJ, MoF and government all point to a concern at the JPY’s weakness and hence we may get some firmer language from the BoJ statement and Governor Kuroda’s press conference but as we’ve said before we think action is a long way off and any intervention has to be coordinated to have a lasting effect. Let’s face it if one bank is looking to potential raise by 100bps whilst the other one is expected to keep rates negatives the fundamentals tell you where the respective currencies are going.
SNB rate announcement. The SNB also meet on Thursday and are expected to continue to push rates higher after their hike in June. This time expectations are for a 75bp hike with an outside chance of 100bps either way this will take Swiss rates back into positive territory for the first time in 8 years. Inflation continues to rise in Switzerland although from a much lower base than its European neighbours. Although the Swiss franc remains strong the SNB appears to be calm about its levels but failing to keep in step with the ECB may lead to a sharp depreciation in the currency something which would raise concerns for the Bank.
Other Central Bank Decisions. A raft of other central bank announcements for the coming week with almost all expected to hike. PBOC starts the week off but, despite the weakness in the Chinese data and the overhang from Covid lockdowns, are expected to keep rates unchanged especially after their surprise cut last month across various of their rate measures. Remember the CCP Politburo is on the horizon and any major stimulus packages are expected to be announced then. Next up the Swedish Riksbank where the market expects a 75bp hike with an outside chance of a larger hike on the back of the recent hot CPI print and the ECB’s recent aggressiveness. Thursday brings the Norges Bank who are expected to match last month’s hike of 50bps this despite a downtick in CPI for August. The Bank has made clear that they want to front load hikes to prevent the opportunity for inflation to become entrenched. Also on Thursday we get rate announcements from the Turkish central bank and the South African Reserve Bank. The markets expect the Turks to hold rates steady at 13% with an outside chance of a cut whilst the South Africans are expected to raise rates by 75bps matching their last hike.
PMIs. Friday brings the flash September PMIs and a first feel for how the major global economies are fairing going onto the last few months of the year. Europe and the UK are expected to struggle back about the 50 boom/bust line. In the US we expect manufacturing to remain above the 50 line but services despite an uptick will remain well below.
One last point as ever I post below the FxMacroGuy’s excellent weekly piece and as is customary, for such a central bank heavy week, he has included all the recent chatter from all the various major central bank speakers we have heard from over the last few weeks. Well worth having in your back pocket in the run up to what will be a very busy week.
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Monday
ECB Speakers
Fernandez-Bollo (08.15 BST)
Guindos (10.00 BST)
Enria (10.45 BST)
Tuesday
Japan Inflation Rate YoY Aug consensus % vs previous 2.6% (00.30 BST)
Japan Core Inflation Rate YoY Aug consensus 2.7% vs previous 2.4% (00.30 BST)
China Loan Prime Rate 1y consensus % vs previous 3.65% (02.15 BST)
China Loan Prime Rate 5y consensus % vs previous 4.3% (02.15 BST)
RBA Minutes (02.30 BST)
Canada Inflation Rate YoY Aug consensus 7.3% vs previous 7.6% (13.30 BST)
Canada Core Inflation Rate YoY Aug consensus % vs previous 6.1% (13.30 BST)
US Housing Starts Aug consensus 1.445M vs previous 1.446M (13.30 BST)
US Building Permits Aug consensus 1.61M vs previous 1.685M (13.30 BST)
BoC Beaudry speaks (20.45 BST)
ECB Speakers
McCaul (16.45 BST)
Lagarde (18.00 BST)
Wednesday
RBA Bullock speaks (03.00 BST)
US Existing Home Sales Aug consensus 4.7M vs previous 4.81M (15.00 BST)
FOMC Interest Rate Decision 75bps hike fully priced in (19.00 BST)
FOMC Economic Projections (19.00 BST)
Fed Chair Powell Press Conference (19.30 BST)
ECB Speakers
Guindos (08.00 BST)
Thursday
BoJ Interest Rate Decision no change expected (04.00 BST)
SNB Interest Rate Decision 75bp hike expected (08.30 BST)
BoE Interest Rate Decision 50bp hike expected (12.00 BST)
BoE MPC Meeting Minutes (12.00 BST)
ECB Speakers
Fernandez-Bollo (09.10 BST)
Tuominen (09.45 BST)
Schnabel (16.00 BST)
Friday
Australia S&P Global Manufacturing PMI Flash Sept consensus vs previous 53.8 (00.00 BST)
Australia S&P Global Services PMI Flash Sept consensus vs previous 50.2 (00.00 BST)
German S&P Global Manufacturing PMI Flash Sept consensus 48.3 vs previous 49.1 (08.30 BST)
German S&P Global Services PMI Flash Sept consensus 47.2 vs previous 47.7 (08.30 BST)
EU S&P Global Manufacturing PMI Flash Sept consensus 48.8 vs previous 49.6 (09.00 BST)
EU S&P Global Services PMI Flash Sept consensus 49.1 vs previous 49.8 (09.00 BST)
UK S&P Global Manufacturing PMI Flash Sept consensus 48 vs previous 47.3 (09.30 BST)
UK S&P Global Services PMI Flash Sept consensus 50 vs previous 50.9 (09.30 BST)
Canada Retail Sales MoM Jul consensus -2% vs previous 1.1% (13.30 BST)
US S&P Global Manufacturing PMI Flash Sept consensus 51.2 vs previous 51.5 (14.45 BST)
US S&P Global Services PMI Flash Sept consensus 45 vs previous 43.7 (14.45 BST)
Fed Speakers
Powell (19.00 BST)
Early Monday
Japan Jibun Bank Manufacturing PMI Flash Sept consensus vs previous 51.5 (01.30 BST)
Japan Jibun Bank Services PMI Flash Sept consensus vs previous 49.5 (01.30 BST)
Good luck.
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Wonderful to get your thoughts on a Sunday, thank you. You should make it a regular thing ;)
May The Queen rest in peace!