Original insights into market moving news

RANsquawk Week In focus, week commencing 16th September 2019


Ahead of the 'blackout' window, Fed Chair Jerome Powell had the opportunity to guide market pricing for the 18th September FOMC, but struck an upbeat tone on the economy, essentially signalling that he was comfortable with market pricing which is weighted in favour of a 25bps rate cut to 1.75-2.00%, as opposed to the more aggressive 50bps, which some members of the FOMC have called for (voter James Bullard argued a cut of that magnitude would help align rates with the market). No doubt, an argument will be made for a 50bps cut, but it seems doubtful that the FOMC will agree; note that July's meeting minutes revealed around half of policymakers did not want to cut then, and the likes of the hawkish voter Eric Rosengren have again questioned the need for a cut ahead of the September meeting, signalling that we may again seen hawkish dissent from both him and Esther George. September's meeting will feature updated economic projections and 'dots'; the current dots were last updated in June, and are out of date (it foresaw the fed funds rate target at 2.25-2.50% by end 2019, although we are already one cut below that; the June projections saw a decline to 2.00-2.25% by the end of n=2020, before rising again in 2021). Fed funds futures currently see the rate at between 1.50-1.75% by the end of this year, falling to 1.25-1.50% by the end of next year, and between 1.00-1.25% by the end of 2021. There will also be attention on the 'longer-run' projection of the fed funds rate, particularly given that some participants, including Powell, have talked about a lower R* rate; UBS, however, does not see the long-run dot moving from the current 2.5% level since it would take a lot of dots to move, and the bank argues that the FOMC has tended to be slow in making changes. In terms of the statement, after Powell's recent remarks, it is hard to see the statement downgrading its view on the economy too aggressively, although there is a possibility of references to the uncertainty, as well as noting weakness in business investment. Powell's press conference may also borrow from his remarks just before the blackout period, where he again talked about uncertainties from trade wars, the global outlook and low inflation.


Consensus supports the SNB leaving rates unchanged at -0.75%. A recent Reuters survey shows 17/24 economists calling for no change while 7/24 see a rate cut; notably, amongst those calling for a cut there is discrepancy over the moves magnitude. There are four calls for 25bp, one for 15bp and two for 10bp, amongst those calling for a 10bp cut are Nordea who believe the Bank will do a like-for-like move following the ECB. At the prior meeting the Bank left rates unchanged at -0.75%, and noted that the FX situation remains fragile and both expansionary monetary policy and intervention remain essential; notably, the release did not alter their assessment of the CHF in-spite of acknowledging its strength, which resulted in the meeting being interpreted as less dovish than expected. EUR/CHF was around the 1.1200 level at the last meeting and the pair has since dipped to a low of 1.0810. Some desks had noted that such an appreciation may lead to the Bank cutting rates. However, emphasis was firmly on the reaction to the ECB meeting; which, in-spite of a cut, reintroduction of asset purchases and tiering, led to a firmer EUR and as such a weaker CHF, potentially removing some of the urgency around policy action. Although, CHF is still significantly stronger when compared to levels around the prior meeting. ECB aside, since the prior meeting SNB speakers have maintained that both negative interest rates and a willingness to intervene in FX markets remains essential to current policy. Notably, Governor Jordan highlighted that interest rate spreads play a vital role in FX rates. On the data front, ING note that the Swiss manufacturing sector is performing well; and in their last quarterly bulletin the SNB stated that manufacturing is the sector most likely to be affected by weaker global activity. However, ING caveat that this sector strength is due to chemical and pharmaceuticals propping up the poor performance in other industries. Elsewhere, August’s CPI prints were firmer than market expectations although Q2 GDP came in below the first quarters mark. Overall, the domestic backdrop shows a slowing of the economy which may prompt further stimulus particularly given the Franc’s recent strength; but, as the ECB meeting actually weakened the CHF, the Bank may see scope to keep rates unchanged and continue with FX intervention for now.


Policymakers once again are expected to stand pat on rates at 0.75% as the terms of the UK’s departure from the EU remains unclear and thus restrains the ability of those on the MPC to act. The Bank continues to guide towards “gradual and limited” rate rises, however, market pricing shows more of a bias towards cuts rather than hikes at the Bank with just under 9bps of loosening priced in by August of next year (admittedly, as highlighted by Capital Economics, expectations for interest rates have risen around 15bps since 1st August). Furthermore, surveyed economists by Reuters will remain at 0.75% until the forecast horizon of 2022. In part, this is likely due to the raft of easing measures taken by various global central banks, most notably the ECB and FOMC with the fallout from the US-China trade war taking its toll on global growth prospects. However, arguably, the unknown nature of the terms of the UK’s departure from the EU remains perhaps the most significant factor clouding the MPCs judgement. With the October 31st A50 ‘deadline’ looming, policymakers have been provided little clarity despite the appointment of PM Johnson and his “do or die” approach as the battle to avert a no deal exit from the EU has lead to an environment of hour-by-hour shifts in market expectations for the eventual form the Brexit will take. As such, for now, all the MPC can do is sit on their hands and make the necessary preparations to ensure that the UK economy will be shielded as much a possible from the fallout of a no deal exit from the EU with a recent Reuters survey putting the odds of such an outcome at 35%. In terms of the overall health of the UK economy, Q2 GDP printed at -0.2%, marking the first contraction since 2012. However, Capital Economics look for a rebound in Q3 with growth to potentially exceed 0.3%. From an inflation perspective, July metrics saw Y/Y CPI print at 2.1% with the August readings due the day before the announcement (Y/Y CPI forecast to fall to 1.9% from 2.1%). Elsewhere, the most recent labour market report showed employment in the three months to July running at 31k, which, as highlighted by Lloyds was much slower than the 115k pace recorded across Q2. Unemployment ticked lower to 3.8% from 3.9% whilst headline wage growth hit the 4% mark. However, at this stage, any improvement in the UK’s macro backdrop will likely continue to play second fiddle to developments in Westminster and as such, barring any surprises by the BoE, this week’s meeting should pass with little in the way of fanfare.


Expectations are torn between the Norges Bank standing pat at 1.25% or finishing their hiking cycle via a 25bp move. A recent Reuters survey noted that 15/29 economists look for a 25bps hike to 1.5% with the remainder look for an unchanged rate of 1.25%. At the prior meeting the Bank maintained their tightening bias, and indicated they anticipate a hike toward the years end. Note, there was no explicit nod to a September move. In terms of domestic developments, August’s CPI print of 1.6% was softer than market expectations though crucially in-line with the Bank’s view of 1.6% Y/Y. However, the core metric was softer, therefore, on-balance, inflation numbers do not provide additional support to their near-term hiking argument. However, SEB believe this is unlikely to be a decisive point in the policy decision. Additionally, Norway’s Q2 GDP metrics were softer than forecast, which may be another factor in favour of no rate change in September. The regional network survey for August noted solid business sector growth but somewhat softer growth overall for the next six months. On the external front, the survey stated, ‘global turbulence does not appear to have acted as a substantial drag on activity’. Consensus for this meeting largely focuses on the aforementioned regional network survey, seen as the Bank’s preferred leading indicator, as a factor supportive of their hiking bias, with SEB calling for a 25bp hike; after-which they will leave their rate path essentially unchanged for the foreseeable future. Additionally, Morgan Stanley note that downside risks to the global economy, while a factor, will not be sufficient to offset the Bank’s intention to hike, as has been the case at prior meetings.


Although the expectation is that the BOJ will likely hold policy on 19th September, it is worth keeping in mind a recent article from Reuters, which has suggested that the decision on when/whether to ease will be a close call, since policymakers are growing less confident in global growth. The article said that while taking rates deeper into negative territory was an option, there were other options, such as cutting 10-year JGB yield target, ramping up purchases of risky assets, as well as printing money. Reuters said that the decision on whether to ease will be a close call, and as such the conclusion may not come until last minute. Part of the BOJ's decision will likely be influenced by measures it could undertake to mitigate the impact of taking rates further negative. But while it seems fashionable among major central banks to ease policy, the BOJ might have more room for patience, given that economic data since the July meeting has generally been encouraging, supported by domestic demand, while some analysts note the economy's resilience to overseas developments. "The pick-up in domestic demand combined with the government's continuing fiscal easing stance should help support business activities," SocGen writes, "as business activities pick up, the BOJ's monetary policies should strengthen." The bank says that with overseas central banks becoming increasingly dovish as a 'precautionary' step, the BOJ's belief continues to be that risk sentiment should pick up as dovish central bank polices permeate, and accordingly, SocGen does not see the central bank changing its policies until 2021. "That said, we continue to expect the BoJ to move forward with adjusting its forward guidance by the end of the year to signal to the market its continued commitment to monetary easing," SocGen said.


Some desks expect rates might be trimmed by as much as 50bps to 5.50% on 18th September. The August inflation data showed a rise of 0.11% M/M, in line with expectations, while the core rate is at 3.0% Y/Y and 2.5% Q/Q-saar, below the BCB's mid-targets. Recently, the BCB chief Campos Neto has noted that the economy warrants stimulative monetary policy, and that the increasingly benign inflation outlook should allow for additional stimulus. However, rate cut expectations have been somewhat tempered this week, after data showed private consumption is holding up well (decent retail sales in July), and the labour market is improving too - all of which suggests that the Brazilian economy got off to a solid start in Q3. Nevertheless, Pantheon Macroeconomics points out that consumer confidence remains low, and consumers are expected to remain cautious in the near-term. "The strength of July's report will not prevent the COPOM from easing further," the consultancy writes, "as other key economic sectors are still under strain, particularly industry which continues to struggle on the back of external and specific domestic shocks," and moreover, "the BRL has performed well this month, giving some leeway to policymakers." Pantheon is in line with the consensus in expecting a 50bps cut next week.


80% of desks polled by Reuters expect the SARB to stand pat on rates at its next meeting on 18 September, while the remaining 20% call for a 25bps cut. At the previous 18 July meeting, SARB policy makers cut rates by 25bps to 6.5%, emphasised that they wanted CPI to stay at roughly 4.5% and warned of the continued presence of upside risks to inflation (which some desks took as a warning over the possibility of a ZAR sell off on Eskom, fiscal, or credit rating related risks). In his most recent comments, Governor Kganyago was upbeat on the economy, pointing to the strong rebound in Q2 GDP growth and noted that two of the key risks identified at the previous meeting (exchange rate and oil prices) have “behaved”, implying it may be difficult to assuaged the governor with arguments for further easing. Returning to the data, aside from the strong rebound in Q2 GDP growth noted above, the data has been less encouraging, inflation for July was on the soft side, business confidence has continued to fall and manufacturing PMI’s have continued to point to contraction in the sector. We are yet to see August’s CPI print, which is due on the eve of the meeting; consensus looks for a 4.3% Y/Y print, which on the face of it would appear to satisfy the SARBs hopes for a rate of “roughly 4.5%” and would be well within the 3%-6% target range. On the same evening, we also get August’s Retail Sales data. Failing a significant deviation from expectations in these two data prints, all indications point to the SARB holding rates, which could lend further strength to ZAR in the medium-term future as other global central banks embark on additional easing.


Tuesday will see the release of the RBA September minutes in which the Central Bank left its Cash Rate at 1.0% as expected and maintained its forward guidance; “the Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed”. Commentary in the statement was generally very similar to that of the August statement. Desks expect limited new information from the minutes, especially ahead of the labour market data on Thursday which is likely to influence the Central Bank’s move at its October meeting. Analysts highlight that this release remains important despite the RBA somewhat reducing some focus on the labour market in its September statement as it added more attention to the global economy. Forecasts look for employment change to rise 10k (vs. +41.1k in July) whilst the participation rate is expected to remain at 66.1%, but the unemployment rate is seen ticking higher to 5.3% from 5.2%. RBC notes that monthly employment change has been more resilient vs. forecasts in recent months, and thus the analysts expect a headline employment change of +10k, the participation rate to pull back to 66% and the unemployment rate to remain steady at 5.2%.


The consensus looks for inflationary pressures to decelerate in August, with the Y/Y rate seen easing to 1.7% from 2.0%, and the M/M rate rising by 0.2% against July's 0.5%. Canadian bank RBC is looking for a -0.1% M/M print, which it says would take the Y/Y rate to 1.9%; the bank notes that the 5% fall in gasoline prices in the month (which will drag on the headline by around 0.15ppts) might be offset by the rise in natgas prices. It also notes that seasonal factors are not significant, but lean negative. The BOC measures have been stable, and continue to knock around the 2.0% mark (an average of the three came in at 2.03% in July), and while this might be subject to some downside which could take it out of the 1.9-2.1% range, favourable base effects will likely see it pick up in the months ahead.