Five major central banks meet this week. Markets will assess their decisions against the economic data of their countries. Except for the patient Bank of Japan and the dovish People’s Bank of China, the US and European central banks see the tightening cycle ending (not ended) with the narrative paving the ground for rates to stay “high for longer.”
Last week, the European Central Bank’s surprise hike did not lift the EUR. Instead, EUR/USD closed below 1.07 for the first week in six months. Economists polled by Bloomberg had expected the ECB to pause on rising recession risks from the Eurozone’s deteriorating data. Markets perceived the hike as dovish against the stagflation outlook in last week’s official forecast revisions by the ECB and European Commission. The Financial Times cited three ECB officials that rates could rise again in 4Q23 if inflation does not fall as projected. ECB Chief Economist Philip Lane, who is speaking on 22 September, considered the higher oil and food prices a significant uncertainty. Still, he hoped the year-on-year increases would fall out in autumn. Lane also sees the second round of inflation from the strong wage increases fueling services inflation needing time to play out. Hence, markets see more hikes tipping the economy into recession and sinking the EUR.
GBP and CHF could meet the same fate when the Bank of England and the Swiss National Bank deliver their expected 25 bps hikes this Thursday. UK GDP contracted by 0.5% MoM in August, its worst in seven months from the declines in services, construction, and manufacturing. Swiss GDP growth flattened to 0% QoQ sa in 2Q23 after the surprise 0.3% growth in 1Q23. Both economies are at risk of the slowing Eurozone and Chinese economies.
At the FOMC meeting this Wednesday, the Fed could defy expectations that the hike in July was its last. As per a Financial Times poll conducted after the stronger-than-expected jump in US CPI inflation to 3.7% YoY in August from 3.2% in July, respondents did not rule out another 1-2 Fed hikes this year. Hence, pay close attention to the dot plot and the forecast revisions in the Summary of Economic Projections.
Given the priority of China’s policymakers to stabilize the CNY, no one expects the People’s Bank of China to lower interest rates on Wednesday. Despite the better-than-expected industrial production and retail sales data, markets are still assessing the risks to China’s economy from companies de-risking and lowering foreign direct investment and increased protectionism from Europe against its electric vehicles. Unlike the recent uptick in inflation in the US and Europe, consensus expects Japan’s CPI inflation to slow to 3% YoY in August from 3.3% in July and excluding food to 3% from 3.1%. The BOJ may stress the need to keep monetary policy accommodative, playing down BOJ Governor Kazuo Ueda’s comment a week ago that Japan could decide to end its negative interest rate policy by the end of the year.
Hence, we cannot rule out the USD extending its recovery into the final quarter and have revised our currency forecasts accordingly.
Quote of the day
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
Abraham Lincoln
18 September in history
Tiffany & Co. started as a stationery and fancy goods emporium in 1837.
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