Weekly Outlook: June 13 — June 17: Fed, BoE, SNB and BoJ Decide on Monetary Policy
We enter another busy week, with four major central banks deciding on monetary policy: The Fed, the BoE, the SNB, and the BoJ. The Fed and the BoE are widely anticipated to hike interest rates by 50 and 25bps respectively, and therefore, all the attention is likely to fall to signals on how they plan to move forward. On the other hand, we expect the SNB and the BoJ to remain on hold, but we cannot overlook the growing speculation that these Banks may soon need to change course as well.
Monday appears to be a relatively light day in terms of economic releases and events. The only top-tier data releases are already out, and those are the final UK GDP for Q1, as well as the industrial production and trade balance for April.
On Tuesday, we get the UK employment report for April, the German ZEW survey for June, the Eurozone industrial production for April, and the US PPIs for May. None of these releases are usually a major market mover, and we doubt that this could be the case this week, especially with four major central banks delivering their monetary policy decisions.
On Wednesday, the spotlight is most likely to fall on the FOMC decision. The Bank is widely anticipated to deliver another 50bps hike, with the CME FedWatch tool suggesting a 25.7% chance for a triple hike. Thus, with that in mind, we don’t believe that a 50bps liftoff will move the markets by itself. Yes, a 75bps increase could lift the dollar and push equities lower, but we doubt that this will take flesh.
Therefore, we believe that all the market attention will fall to the accompanying statement, the economic projections — especially the new dot plot — , and the press conference by Fed Chair Jerome Powell. Recently, following the release of the minutes of the prior gathering, there had been some speculation that due to the latest economic slowdown in the US, the Fed may need to pause its tightening process after summer. However, several policymakers thereafter argued against such a strategy, with Friday’s accelerating inflation adding more credence to their view.
Given that the Fed has clearly telegraphed a double hike now and another one in July, the focus will fall on what they signal from there onwards. In our view, they are very unlikely to signal a pause after summer, but we also see them not keep signaling double hikes. Due to the latest economic slowdown, they may avoid committing themselves to such bold actions from now. After all, there are a lot of data to be released and seen until September. We see the notion for signaling 25bps hikes towards the end of the year.
Now, how this will affect the markets? We have to see it in comparison to the current market pricing. According to the Fed Funds futures, market participants believe that interest rates will hit 3% by December and thus, anything suggesting that this may not be the case could result in a pullback in the US dollar and a relief bounce in equities. However, this is unlikely to be a trend reversal signal for the dollar. Even if the Fed signals a slowdown in rate hikes after summer, other central banks are still expected to proceed at a slower pace, which may keep the greenback on the front foot. We will treat a potential setback as a corrective phase. In order to start examining a potential reversal, we would like to see the Fed clearly signaling a pause, while we could see it gaining immediately if the new “dot plot” keeps pointing to double liftoffs, even after summer.
As for Wednesday’s data, during the Asian trading, we get China’s fixed asset investment, industrial production, and retail sales, all for the month of May, while later in the day, still ahead of the FOMC decision, the US retail sales for the same month are due to be released.
On Thursday, the central bank torch will be passed to the SNB and the BoE. Getting the ball rolling with the SNB, expectations are for Swiss officials to keep their benchmark rate untouched at -0.75%, but with inflation accelerating to +2.9% yoy, its highest rate in 14 years, there is speculation that this Bank may need to start raising interest rates as well. Some even believe that it should start doing so at this meeting.
However, with wages staying relatively subdued, and with inflation in other major economies running at much higher rates than in Switzerland, we believe that SNB policymakers have the flexibility to wait until September. While the ECB expected to start raising interest rates in July, this could allow them to keep the Swiss franc in check, as the interest rate differentials will still be in favor of the common currency. Let’s not forget that the SNB has been long holding the view that the Swiss franc is highly valued. So, waiting until September could disappoint those who want a hike now and may result in a setback in the franc, which we believe it may be something that officials want.
Now, passing the ball to the BoE, this Bank is widely anticipated to deliver its 5th consecutive quarter-point liftoff. Thus, if this is the case, we believe that the attention will fall on hints and signals on how British policymakers plan to move forward.
When they last met, although they hiked by 25bps, officials warned over recession risks, with the Bank lifting its inflation projections to above 10% in the last three months of the year, and downgrading its GDP forecasts to show a contraction of 0.25% in 2023 from a previous estimate of 1.25% growth. Since then, preliminary GDP data for Q1 revealed a slowdown, and according to the PMIs, the weakness continued in Q2 as well, at a time when inflation remained elevated at +9.0% yoy. In our view, this adds credence to officials’ concerns over a recession, and although they may continue lifting rates due to very high inflation, their path may be slower than other major central banks, like the Fed and the BoC. Thus, we believe that officials will repeat their recession warnings, something that may weigh on the British pound.
As for the rest of Thursday’s events, ahead of these two central bank decisions, during the Asian session, we get New Zealand’s GDP for Q1 and Australia’s employment report for May.
Finally, on Friday, we have another major central bank deciding on monetary policy, and this is the BoJ. When they last met, Japanese officials decided to keep all their policy settings untouched, noting that they will offer to buy unlimited amounts of 10-year government bonds to defend an implicit 0.25% cap around its zero target every market day.
This puts at rest rumors that the Bank may need to tweak its yield curve control policy soon due to the continued tests near that cap and the weakness of the yen, and reaffirmed the strong willingness of policymakers to stay ultra-loose at a time when other major central banks have flagged aggressive tightening.
Several BoJ policymakers have made it clear that they are unlikely to alter their existing policy at this gathering, raising speculation over further widening in the monetary policy divergence between the BoJ and other major central banks, and thereby hurting more the already wounded yen. That said, with USD/JPY breaking above 135.00 for the first time in 20 years, and inflation running slightly, but still above the BoJ’s target of 2%, there may be some speculation that the BoJ may soon need to change course. Thus, although no action is expected at this gathering, we will dig into the statement for clues and hints as to how this Bank is planning to move forward. Anything suggesting that they may soon start changing course could be a reason for market participants to buy back some yen.
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