Week in Focus – Week Commencing 17th September 2018
Monday: Eurozone CPI
Wednesday: BoJ Interest Rate Decision, UK CPI, New Zealand GDP
Thursday: SNB Interest Rate Decision, Norges Bank Interest Rate Decision, EU leaders expected to discuss Brexit
Friday: Japan CPI, Eurozone Markit Manufacturing, Services and Composite PMIs (Flash), Canada CPI
Sunday: JMMC meeting in Algeria
The Swiss National Bank is not expected to tweak monetary policy at its meeting next week (20 Sept), and the Street expects it will hold rates and again reiterate it is prepared to intervene in FX if required. Since the SNB's June meeting, EURCHF has fallen from around 1.15 ("highly valued") to sub-1.13; The SNB changed its assessment of the franc in September 2017 to "highly valued" from "significantly overvalued" after the franc fell from EURCHF ~1.09 to ~1.1450 between the June and September meetings, and therefore, markets are on alert to a possible change of language of the franc. "On communication, we expect the SNB to take note of the broad-based appreciation of the Swiss Franc over the past three months on the back of safe-haven flows, and to continue to express the view that the CHF remains 'overvalued'," Goldman Sachs says also expects the central bank to emphasise that "the risks [on growth] are more to the downside," given the political and economic developments both in the Eurozone as well as emerging markets. GS looks for the SNB's inflation forecast to be nudged up by 0.3ppts after oil prices have ticked up, though the moves in the franc may see its medium-term inflation profile lowered slightly. Looking ahead, GS says it "continues to expect the SNB to be reactive to the ECB's monetary stance which, given the outlook for core inflation within the Euro area, is set to remain highly accommodative for a prolonged period of time," and doesn't expect the central bank to begin lifting rates until Q4 2019 at the earliest, adding that over the past few quarters, market pricing has converged towards its dovish forecast for SNB policy rates.
Analysts are unanimous in looking for a 25bps hike from the Norges Bank this week, taking the deposit rate to 0.75%. This comes after the Norges Bank flagged a September rate hike at their policy meeting in June with ING stating that this message was conveyed to the market as “the domestic momentum that underpins the NB’s desire to raise interest rates gradually appeared intact”. This view was then reinforced at the August meeting after the Bank maintained their view on the economy and inflation holding steady over the prior two months, prompting markets to pencil in a rate hike in September with a potential further 25bps of tightening expected in March 2019. Since August, domestic core inflation printed at 1.9% on a Y/Y basis (fastest pace since Jan 2017) which comfortably exceeded the market consensus of 1.7% and the Norges Bank forecast of 1.5%. This was then followed by a strong regional network report for Q3, after which, Nordea highlighted that “the main indicator (current situation) was 1.35 which indicates quarterly growth at 0.68% Q/Q, close to the Norges Bank’s forecast at 0.7%”. As such, the likes of Nordea and Deutsche Bank look for not just a rate hike this time around but also a steeper rate path with Deutsche expecting an additional hike in March 2019 and then a further 25bps of tightening every six months thereafter.
The focus of next week's monetary policy meeting (19 Sept) will be on board Member statements on forward guidance and possible side-effects of ultra-low rates. "We expect discussions to center on an interim assessment of policy measures decided at July's MPM, particularly forward guidance and the expansion of the tolerable range for long-term interest rates," analysts at Goldman Sachs write, and believes that policymakers will elect to stand pat in all of those categories, and also expects rates to be maintained at -0.1%, and the 10-year yield target around 0%. Goldman also expects the bank to leave its ETF purchases unchanged. This week, reports suggested that many officials at the BOJ believe the board will need to cut its JPY 6trln annual buying target for ETFs if its July decision to buy in line with market conditions brings about a sustained decline in its purchases. There are also questions about how the BOJ will implement its forward guidance, and there will also be a focus on the discussion at the BOJ with regards to the cumulative side-effects of low rates on financial intermediaries. "While the Policy Board members are all in agreement that no major problems are currently occurring in terms of financial intermediation functions, there is greater disparity in their opinions concerning cumulative future side-effects of ultra-low interest rates," Goldman says, "Mr. Suzuki (a hawkish Policy Board member) and Mr. Kataoka (a dovish one) are—as expected—at opposite ends of the spectrum, while Deputy Governor Masayoshi Amamiya’s comments lie somewhere near the middle as they are in line with official statements. Governor Kuroda, meanwhile, has clearly stated that raising long-term rates would make no sense as it would not be positive even for financial institutions." Goldman notes that it is unclear how markets will interpret the forward guidance and gauge the potential side effects. "For now, however, it appears that the BOJ is not considering rushing into a rate hike, contrary to some market observations, especially based on Governor Kuroda's comments about (possibly multiple) uncertainties being a hurdle for rate normalization and the possible effects of rate hikes on the economy and financial institutions," Goldman says.
This week sees a couple of tier 1 data points due for release from the UK with CPI and Retail Sales due on Wednesday and Thursday respectively. Kicking off with inflation, Y/Y CPI is expected to slip to 2.4% in August from the 2.5% rate seen in July with core CPI set to hold steady at 1.9%. Ahead of the release, RBC back the consensus of 2.4% by stating that “fuel prices rose again last month, meaning that should continue to be the case in the August. However, with the Y/Y increase in pump prices easing and the pass through to prices from previous falls in GBP continuing to fade we see CPI inflation falling slightly to 2.4% Y/Y this month”. For retail sales, ING expect that metrics will likely soften from last month given the ongoing squeeze on spending power. Ultimately, this week’s data might not provide UK asset classes with much in the way of a sustained reaction given that the BoE are in auto-pilot mode and the likelihood the Brexit-related headlines could take precedent over developments in the UK economy itself with this week seeing an informal EU summit take place in Salzburg on Thursday as discussed below.
Ever since UK Parliament has returned from its summer recess, Brexit-related commentary has continued to increase in both frequency and pertinence. Notable developments over the past few weeks have included a slightly more conciliatory Michel Barmier who was quoted as saying that striking a Brexit deal in the next 6-8 weeks is ‘realistic’ with reports last week suggesting that the UK and EU are laying the groundwork for a special summit in November to sign an accord. That said, it has been far from plain-sailing on the domestic front for UK PM May who continues to face pressure from within her own party as speculation mounts whether the Brexiteer-wing of the Conservative Party could launch a leadership challenge (something which they unsurprisingly, have denied. This has all come ahead of this week’s informal meeting in Salzburg. Expectations for breakthroughs this week are relatively low with the EU seemingly viewing the Conservative Party conference (30th Sept-3rd Oct) with more interest as that’ll provide them with a greater indication of what concessions May will have to make to her own party before aiming to seal a deal with the EU at the October summit. As such, despite GBP’s hyper-sensitivity to Brexit headlines, this week might not provide a substantial shift in the negotiations and therefore GBP moves might be relatively short-lived at this stage. That said, former-Brexit secretary Davis was recently quoted as believing that the Salzburg meeting could lead to a reset of May’s Brexit plans as he deems them unacceptable to the EU. Such a change in the tide of relations between the UK and EU would likely increase the will of the Brexiteers ahead of the Tory party conference.
After headline CPI hit a six-year high in July at 3.0% YY, analysts at RBC expect some moderation in August, with the MM rate printing at -0.2% (prev. +0.5%). The BOC core measures, however (common, median, trimmed), averaged 2.0%, where it has been knocking around for much of this year, which is why BOC officials have seen the inflation surge as transitory. RBC explains that last month's data was largely driven by a surge higher in airfares that it says was due to methodology changes, and expects some of those gains to be given back in August. Elsewhere, gas prices declined by around 2.0% this month, which RBC believes will contribute to bringing the MM rate into negative territory. "Gas prices will still be up ~20% y/y (contributing ~0.7ppt to headline inflation) and a big reason why the BOC sees the rise to the top-end of their target range as 'transitory'," RBC writes, and "the core measures are a much better gauge of underlying inflation pressures and should stay around the 2.0% level on average for the seventh consecutive month."