Major central bank rundown

It’s time for your central bank catch up. The link to the latest statement is at the bottom of each section, so just click there to read the bank’s central statement. Remember, there is no substitute for actually reading a central bank statement yourself and it will almost certainly be of great help. However, here is a summary analysis of the position of the major central banks.

Reserve Bank of Australia, Governor Phillip Lowe,  4.10%,  Meets 4 August

Exercising patience as RBA tackles prolonged inflation

Ahead of the most recent RBA meeting, we discussed the possibility of a downward shift in AUDNZD due to a dovish surprise from the RBA. The market was divided 50/50 on whether the RBA would raise rates, but it ultimately chose to keep rates steady at 4.10%. Nonetheless, the primary focus was always going to be on the forward guidance provided by the RBA and its impact on short-term interest rate markets.

The implications of the decision to pause

While the RBA decided to keep rates unchanged, it still indicated its intention to implement further rate hikes. The crux of this meeting lay in the signalling of future rates rather than the actual decision itself. When examining short-term interest rate markets immediately after the decision, rate expectations remained largely unchanged over a longer timeframe. The projected terminal stood at 4.62%, only slightly higher than the previous expectation of 4.54%. The RBA acknowledged that “the balance of risks on inflation had shifted to the upside compared with a month earlier.” However, it also believes that inflation has peaked and is projected to return to the target range by mid-2025.

Exercising patience

In its recent statement, the RBA chose to pause on rates due in part to the view that inflation would take longer than anticipated to reach the target range. It opted for a cautious approach, seeking to monitor economic data to safeguard the progress made in employment. Australia currently boasts historically low unemployment rates and the RBA aims to avoid unnecessary damage to the labor market. Simultaneously, it acknowledged the risks of inflation becoming entrenched in higher wages.

What to monitor moving forward

AUD traders should closely monitor two key releases: labor data and inflation data. If these figures surprise on the upside, particularly inflation data, it is likely that the AUD will strengthen against the NZD once again, driven by heightened rate expectations from the RBA. You should also look at household spending and stress. If households show significant signs of strain then watch for that to slow the RBA down from its current rate path. Key daily support and resistance levels are marked below on the AUDNZD chart. Read the full RBA statement here.

 

European Central Bank, President Christine Lagarde, 3.75%, Meets 14 September

 Another central bank moving to data dependence

Prior to the recent ECB meeting, expectations of a 25bps rate hike were fully priced in, with a focus on forward guidance and rate trajectory the focus. Despite increased inflation expectations and lowered GDP projections, the ECB aims to maintain a flexible and data-driven approach. During July’s rate decision, the European Central Bank reached a unanimous agreement. Notably, Christine Lagarde said in the press conference that the wording changes in the statement were purposeful and significant, aimed at conveying specific messages rather than being arbitrary or inconsequential.

The ECB highlighted the importance of data assessment in determining the extent of its future actions, emphasising that it is not bound by forward guidance. It explained that the recent cut in the minimum reserve remuneration rate does not impact its overall policy stance. When Lagarde was asked about the possibility of pausing rate hikes, she clarified that the ECB is moving towards a stage where it decisions will be data-dependent. The ECB will take into account staff projections and additional data to make informed decisions about either continuing rate hikes or pausing. It stressed that if it decides to pause, it will definitely not result in a rate cut. While a pause may not be extended indefinitely, the decision will be grounded in the data available.

Regarding inflation, the ECB acknowledged the role of wage increases in driving it upward. However, it assured that it has not observed any second-round effects at the moment. The Governing Council has endorsed this perspective. It will be interesting to see how this develops as the core reading remains ‘stickier’ in the eurozone.

Overall, the ECB’s stance is firmly anchored in data analysis, signaling a cautious approach to future policy decisions based on evolving economic conditions and inflation dynamics.

Slowing Eurozone growth worries

The more cautious tone from the ECB is undoubtedly due to the weak PMI’s just prior to the meeting. There is a big miss across the board as sentiment sours across purchase managers. See the ECB monetary policy decision here.

 

Bank of Canada, Governor Tiff Macklem, 5.00%,  Meets September 6

Inflation worries persist

Although headline inflation fell to 3.4% in May, the BoC is concerned that inflationary pressures could easily re-emerge if rates are not restrictive enough to dampen demand.

This fear about returning inflation prompted the BoC to hike rates again in July’s meeting bringing the Bank of Canada to have made two back-to-back hikes in June and July’s meeting. With successive increases in policy rates in June and July having occurred, there is now cautious optimism from the BoC that inflation will gradually return to the 2% target. However, the inflation forecasts for 2024 and 2025 were both revised higher. Let’s explore key highlights from the BoC’s discussions.

By taking action now, and implementing higher interest rates,  the BoC aims to prevent more drastic measures in the future. Despite some signs of easing, the labor market remains tight, presenting a continued challenge for policymakers. Striking the right balance is crucial as a strong labor market can contribute to inflationary pressures. Look at the latest labour data showing strong full-time numbers for June.

Balancing risks

Central banks, including the BoC, are mindful of the risks associated with both under and over tightening monetary policy. They aim to find an equilibrium that brings inflation back to the desired target level without hindering economic growth. The BoC’s decision to raise rates reflects its acknowledgment of persistent excess demand and underlying inflationary pressures. The governing councils consider that a more restrictive policy stance is necessary to steer inflation towards the 2% target. While the possibility of keeping rates unchanged was discussed, the councils weighed the costs of delay against the benefits of waiting, ultimately leaning towards proactive action.

What to look for going forward

As before, Canadian jobs data will continue to be important as the BoC noted that the labour market remains very tight. For central bankers when they are setting policy high employment means inflation pressure. Inflation, of course, will be important. The key tradable opportunities, therefore, will once again come from any out of consensus prints in either employment data or inflation data in the coming days before the next BoC meeting. Also, keep an eye on oil prices. Higher oil prices support CAD and the oil market is projected to tighten through 2023. The bank will carefully assess core inflation dynamics, CPI inflation outlook, inflation expectations, wage growth, and corporate pricing behaviour to achieve the inflation target. Read the full Bank of Canada rate statement here.

 

Federal Reserve, Chair: Jerome Powell,  5.375%. Meets 20 September

The last rate hike?

Although June’s meeting was seen as broadly more hawkish, we noted that Chair Powell emphasised that projections are not set in stone, and decisions will be made on a meeting-by-meeting basis moving forward.  We noted in June that the central bank will closely monitor jobs and inflation data, and if it shows a downward trend, it could prompt the Fed to transition from a skip to a pause stance. So, the weaker June CPI print released on July 12 was just the sort of print the Fed would be wanting to see.

The recent July Fed meeting went as expected with the lower-than-anticipated June CPI data giving the Fed hope for a potential path back to 2% inflation. While the June headline inflation came in at 3% and the core at 4.8% (although still high, the core was below the market’s minimum expectations), there are clear indications of a gradual decline in inflation.

The confidence derived from this data led the Fed to refrain from definitively signaling a rate hike for September. Fed Chair Jerome Powell mentioned that a September hike is possible, but it will depend on the upcoming data. In June’s dot plot, Powell had explicitly mentioned the possibility of two more rate hikes. However, the recent 25 bps hike did not come with a clear signal for another one, causing an immediate downward reaction in the USD. This implies that the market now sees the Fed as being more “data dependent” in its approach.

What to watch now moving forward

Looking ahead, incoming inflation data holds significant importance for the Fed. If inflation continues to decrease, it will increase confidence in the market that the Fed has reached its peak terminal rate. In terms of intraday trading expectations:

  • Lower-than-expected inflation prints typically lead to: Lower USD, lower US10Y yields, higher US stocks, and higher gold prices.
  • Higher-than-expected inflation prints typically lead to: Higher USD, higher US10Y yields, lower US stocks, and lower gold prices.

On top of this, strong domestic data could lead to USD strength on expectations that higher-than-expected growth could boost inflation.

Key upcoming inflation data to keep an eye on includes the US CPI on August 10th at 13:30 UK time, US Core PCE on August 31 at 13:30 UK time, and University of Michigan 1 & 5-year inflation expectations at 15:00 UK time. These data releases will heavily influence market sentiment and trading dynamics. See July’s Fed statement here.

 

Bank of England, Governor Andrew Bailey, 4.50%, Meets 3 August 2023

Inflation worries & growth concerns; the stagflation facing the UK

The Bank of England is facing the challenge of avoiding two potential problems: high inflation and a sharp slowdown in economic growth. The bank is currently trying to find a balanced approach to interest rates to steer clear of both issues. In June, the Bank of England raised interest rates by 50 bps with a 7-2 vote split, which was a surprise.  In terms of the meeting on June 22, a Reuters poll on May 31 had 48/50 economics seeing the BoE hiking rates by 25bps to 4.75%. That same poll also now has economists projecting a 5% peak in 2023. That situation radically changed after the latest UK inflation data showed the core reading rising to 7.1% y/y.

The stakes have never been higher for Bank of England policymakers. May’s core inflation has risen to the highest level since John Major was in Downing Street delivering another blow to the economy, and with headline inflation remaining at 8.7%, a 50bps rise was necessary to avert further policy failure. The BoE is unlikely to clearly signpost how high rates will go at this stage because the recent rapid pricing is disruptive for UK businesses and homeowners. However, investors should not rule out further hikes to come. The headline print for June’s CPI was a relief and at least showed inflation moving lower.

Despite the stagflation and pain, it will cause in the near-term, market expectations were seeing rates exceeding 6% in early 2024, and the threat of a recession looms more than ever. However, over the last few weeks expectations have now dropped with the lower inflation prints, and the peak rate is now seen at under 6% as of July 28. The risk from here is that there could be GBP falls on growing stagflation fears. Read the full BoE statement here.

 

Swiss National Bank,  Chair: Thomas Jordan, 1.75%, Meets September 21

SNB signals more hikes ahead

On June 22, the Swiss National Bank raised rates to 1.75% and hinted at potential future rate hikes. While headline inflation in Switzerland remains one of the lowest in the G20 at 2.2% y/y, the SNB has revised its inflation forecasts upward, citing ongoing second-round effects, higher electricity prices, and persistent inflationary pressure from abroad. Check out the latest forecasts below.

With average annual inflation projected at 2.2% for 2023 and 2024, and 2.1% for 2025, the SNB believes the battle against inflation is far from over. The next interest rate meeting on September 21 is expected to result in a 25 bps hike to 2.00%. Short-term interest rate markets anticipate a terminal rate of 2.12%, indicating optimism that the SNB is approaching the peak of its rates.

What does this mean for the future? Keep a close eye on incoming inflation data as it holds significant importance for the SNB’s rate policy. Higher-than-expected inflation could boost the Swiss franc as markets anticipate higher rates. Conversely, a sharp decline in inflation data may lead to CHF depreciation, as hopes arise that the SNB will not need to hike rates again in September. Stay alert to incoming inflation data! You can read the SNB’s full statement here.

 

Bank of Japan, Governor Kazuo Ueda, -0.10%, Meets 22 September

BoJ finally adjusts its yield curve control program

It was at the end of last year that the BoJ first unexpectedly tweaked the Yield Curve Control band to +/- 0.50% in order to increase bond purchases to JPY 9 trillion in Q1 2023. At the time, the BoJ played down the significance of this move, saying it was to improve market functioning and encourage a smoother formation of the entire yield curve. However,  since then speculation was continually growing that this was the start of the BoJ exiting its ultra-loose monetary policy.

Since that time inflation in Japan has been steadily moving higher and inflationary pressures are now being recognised by the BoJ. In the July meeting, the BoJ revised inflation forecasts to 2.5% from 1.8% for 2023 but did cut the 2024 forecast to 1.9% from 2%.

 

Finally, the BoJ adjust its yield curve control policy

The decision was reached by an 8-1 vote, with Nakamura being the sole dissenter on yield curve control. The BOJ believes it is appropriate to enhance the sustainability of its monetary easing measures. To achieve this, the BOJ plans to operate yield curve control more flexibly, enabling it to respond swiftly to both upside and downside risks in the economy. The uncertainty surrounding Japan’s economic outlook and prices is deemed to be extremely high.

During its assessment, the BOJ found that Japan’s consumer inflation has exceeded the projections made in the April outlook. Consequently, the BOJ has decided to conduct fixed-rate unlimited buying for 10-year Japanese government bonds for a second time.

Additionally, the BOJ has expanded the range of 5-year to 10-year JGB purchases from JPY 875 billion to JPY 900 billion. Furthermore, it has widened the range of 3-year to 5-year JGB purchases from JPY 725 billion to JPY 750 billion. These adjustments in bond purchases aim to address the evolving economic conditions and support its monetary policy objectives. So, although the Bank of Japan is keeping rates negative at -0.10% it will allow the yield curve control more flexibility by purchasing JGBs at a rate of 1.0% (vs prior of 0.5%). See the full BoJ statement here.

 

Reserve Bank of New Zealand, Governor Adrian Orr,  5.50%,  Meets 16 August

RBNZ: Holding indefinitely

At its meeting prior to July, the RBNZ signaled that it had achieved its goal for timbering and did not raise rates higher than 5.50%. In its latest meeting on July 12, the RBNZ reiterated the view that it has successfully completed its hiking cycle, but that it expects to maintain restrictive interest rates in the foreseeable future. The focus is on domestic progress, with consumer spending easing, house prices stabilising, and businesses experiencing slower demand. While employment remains high, the Committee considers that recent indicators suggest a gradual easing in the labour market. However, note that unemployment remains at the low level of 3.4%, average hourly wages continue to increase, full-time employment is rising, and the number of employed persons is continuing to increase. So, the labour market will be a key focus for the RBNZ moving forward and there are no obvious signs of the labour market cooling.

The RBNZ is pleased with the progress made and sees a slow decline in inflation, giving it confidence in its restrictive policy.

The announcement aligns with market expectations, resulting in minimal impact on the NZD. However, the RBNZ is signposting a longer rate hold than anticipated, which should provide broad support for the NZD in the short term.  However, investors will closely monitor labor and inflation data to gauge changing pressures.

Short-term interest rate markets reflect the expectation of higher rates for a longer duration, with projections of 5.40% by October 2024 at the time of writing. You can read the full RBNZ statement here.