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RANsquawk Weekly G10 Central Bank Monitor: Fed Chair news to overshadow FOMC meet, BOE may hike for the first time in a decade

  • FED: Fed chair announcement to overshadow FOMC meeting
  • ECB: Draghi pulls-off magic act
  • BOE: MPC to hike for the first time in a decade
  • BOJ: Policy meeting likely to be a snooze fest
  • BOC: Cautious BOC enters data-dependent mode
  • RBA: Cyclical upswing still missing
  • RBNZ: Labour market data to do little to sway RBNZ
  • Norges Bank: Move on, nothing to see here
  • Riksbank: Tilting towards tightening

FEDERAL RESERVE

  • The FOMC is likely to keep rates on hold between 1.00-1.25% at its meeting concluding on 1 November. There will be no updated economic projections, nor will there be a press conference with Chair Janet Yellen. Most have noticed the pattern that, in recent years, the FOMC has not hiked or significantly adjusted policy in a non-press conference meeting. “Recent Fedspeak has shown an eagerness to move at the December meeting, but given the touch more concern about low inflation relative to earlier this year, participants would prefer to see some more evidence of inflation rising before moving again,” write analysts at UBS. The current probability of a Fed hike in November stands at just 1.5%, according to the CME’s Fedwatch tool; however, money markets are pricing in with almost near-certainty that the Fed will raise rates in December, with the implied probability of a hike running a touch beneath 98%.
  • The Fed’s balance sheet normalisation plans were announced at the September meeting, and are now underway, with $6bln of Treasuries and $4bn of MBS being allowed to roll-off per month (at the current rate, which will be raised after tspanee-months). “The FOMC wants the balance sheet runoff on autopilot and we see no need for them to deviate from that plan now,” UBS says, “we also do not expect any further guidance on the long-run framework for the balance sheet.”
  • Elsewhere, the Trump Administration will likely announce its nominee for the role of Fed Chair next week, with recent sources reports confirming that the race is down to current Governor Jerome Powell and Stanford economist John Taylor, of the ’Taylor Rule’ fame. Of the two, markets perceive Taylor will be the more hawkish candidate, given his eponymous rule suggests that rates should be perhaps as high as 4%, according to some.
  • What some, however, are neglecting to mention is that Taylor’s original rule assumed an equilibrium interest rate (referred to as r*) around 2%; “whereas most economists agree that the neutral rate is lower now. Taylor himself doesn’t seem to be one of them,” Capital Economics says. The consultancy notes that as recently as 2016, Taylor himself made the case that there are reasons to believe that r* “has not changed that much”. Nevertheless, if Taylor is nominated, markets are likely to respond with dollar strength and higher yields, if the reaction to the sources reports is anything to go by.

EUROPEAN CENTRAL BANK

  • The ECB announced it would reduce the rate of its net monthly asset purchases by half to €30bln, while extending the purchase horizon by nine-months beginning in January; the tweaks were telegraphed well by so-called sources reports in the run-up to the event.
  • The ECB’s moves, however, were described as “dovish” by most analysts. Perhaps this was due to President Mario Draghi strongly emphasising that the programme remains open-ended in nature (though the decision to keep it this was not unanimous, according to German press, which said that Sabine Lautenschlager, Benoit Coeure, Jens Weidmann and Klaus Knott dissented) Additionally, Draghi said the ECB’s reinvestment policy was “massive”, with reinvestments continuing long after the asset purchase, which would help to maintain easy liquidity conditions and an accommodative monetary stance.
  • On rates, Draghi once again reiterated forward guidance on rates (they will “remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases”). “Rates won't rise for a long time and well after the net asset purchases have come to an end,” writes Morgan Stanley. “The first depo rate hike, of just 15bp to -0.25%, will happen in March 2019, in our view. However, the timing of this move remains quite uncertain, as it's a long way away.”
  • On the outlook for inflation, Morgan Stanley notes that the ECB’s confidence is growing: “The press conference also highlighted that, given the unabated growth momentum, the Governing Council is becoming more confident about the likelihood of a self-sustained rise in inflation, with the underlying HICP metrics having ticked higher from a low base,” MS writes, “but, once again, as domestic inflation pressures are still rather muted, the ECB is of the view that a substantial monetary stimulus is needed to support the economy and, therefore, facilitate the uptrend in HICP inflation.”

BANK OF ENGLAND

  • After the September meeting minutes revealed that a majority of MPC members thought that it would be appropriate to withdraw some stimulus “over the coming months,” the consensus view now expects the MPC to hike the Bank Rate for the first time in a decade, by 25bps to 0.50%. The stock of asset purchases is expected to remain unchanged (asset purchases at £435bln and corporate bond stock at £10bln).
  • Analysts believe that six of the nine-member MPC will vote to hike (versus two previously, Ian McCafferty and Michael Saunders). The tspanee dovish dissenters are likely to be Sir David Ramsden, who distanced himself from the majority looking for a hike recently; Sir Jon Cunliffe, recently suggested that a hike remains an open question; and Silvana Tenreyro reiterated data-dependence with a few dovish tones, suggesting that she may be a wildcard.
  • Recent data has will have tilted the neutrals into the hike camp: the latest consumer prices data were firm, strengthening the case for a hike; employment growth eased, and wage growth slipped after revisions presenting a dovish case; and retail sales data slumped more than expected. However, this week’s Q3 growth data surprised to the upside suggesting that the underlying economic landscape is stable, strengthening the case for a hike.
  • The MPC will also update its economic forecasts, and we are unlikely to see major tweaks the forecasts made in August, HSBC believes: “To justify a rate rise, the BoE is likely to continue to assume: a relatively smooth Brexit; that a tighter labour market leads to faster wage growth; and a pick-up in investment and productivity,” the bank writes, but “data revisions and its own policy action means it may have to revise down growth by around 0.1ppt in each year.” HSBC adds that higher oil prices could mean that near-term inflation projections might be raised a touch with the bulk of those changes likely to be on the near-term forecasts.

BANK OF JAPAN

  • The Bank of Japan will issue its latest monetary policy decision on Tuesday. No change is expected at the decision, as notable inflation continues to be somewhat of a pipedream for policy makers. Bank of America notes that “the recent rally in Japanese equity markets had seen the BoJ's ETF purchases slow sharply in October, and as a result some investors have asked whether the BoJ may announce a reduction in its risk asset purchase targets in the relatively near future.” Despite the pullback in purchases BAML believes that “the hurdle for such a cut remains very high.”

BANK OF CANADA

  • Although the BOC held rates at 1.00% this week, there was a distinct note of caution, with the central bank saying “while less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate.” There were also mentions for the risks around NAFTA, OSFI rule changes regarding residential mortgages designed to cool the housing market (which Governor Stephen Poloz also mentioned in his post-meeting press conference), which some have taken as a signal that the Bank will keep policy steady in the months ahead, allowing the risks to clear.
  • Accordingly, BMO has pushed-back its call for the next BOC hike to March from January, while trimming its view on the number of hikes next year to tspanee (from four), noting that the January policy meeting will potentially take place at the heart of NAFTA uncertainty, and as the new real estate rules come into effect.
  • The latest batch of economic forecasts saw the BOC’s growth view revised up given the strong performance in Q2, raising 2018 growth a touch while trimming the 2019 forecasts slightly, back in line with the potential growth rate. The central bank now also believes that the economy is growing at close to its full potential (in the previous MPR, it estimated that the output gap would be closed towards the end of 2017). Elsewhere, the Bank said its policy stance will be guided by incoming economic data.

RESERVE BANK OF AUSTRALIA

  • Inflation data released this week was a disappointment, and although it missed most analysts’ expectations, it was in line with Westpac bank’s analyst views: “The Australian economy appears to be locked in a low inflation environment where there are some sectors experiencing modest inflation, particularly around housing and health, but being mostly offset by deflationary pressure due to the competitive squeeze in consumer goods,” and it warns that “at the stage we struggle to find any broad cyclical upswing in prices that you would normally expect to see at this stage of the economic recovery.”
  • It is worth noting that the Australian Bureau of Statistics is set to re-write the way it calculates CPI in the coming months, and Westpac argues that this may likely see rates of inflation trimmed further as baskets are reweighted, perhaps by as much as 0.4ppts in 2018. Interestingly, this was a theme touched on by RBA Deputy Governor Guy Debelle, in a speech made after the release of the CPI data. The focus of Debelle’s speech was on the impact of uncertainty on monetary policy, but the Deputy Governor also took time to discuss the upcoming tweaks to the way CPI is calculated, making the case that the annual pace of inflation has been overstated by around 0.25ppts “While the RBA is aware of this bias, we are not able to be precise about its magnitude until the new expenditure shares are published, because past re-weightings are not necessarily a good guide. It is also not straightforward to account for this in forecasts of inflation,” Debelle said. But, he did note that “from a policy point of view, the inflation target is sufficiently flexible to accommodate the bias, given its relatively small size.”

RESERVE BANK OF NEW ZEALAND

  • Next week’s labour market data will be eyed to see how much scope the RBNZ has to loosen policy ahead, given it will be the last major piece of domestic data ahead of the RBNZ’s November meeting Analysts at ASB see QQ growth rising to 0.9% in Q3 from -0.1%, and a small tick-up in the participation rate is likely to push the rate of joblessness down by 0.1ppts to 4.7%, the bank believes. The Labour Cost Index, meanwhile is seen coming in at 1.9% annualised, rising from 1.6%; “the prospect of LCI wage inflation moving above the inflation target midpoint [2%] should dispel the notion of OCR cuts,” ASB writes.
  • The RBNZ’s previous Monetary Policy Statement had pencilled-in a slightly lower unemployment rate, as well as a temporary boost to wages, ASB notes. And as such the rise in wages is “unlikely to trigger a shift in viewpoint from the RBNZ.” ASB adds that the central bank has bigger fish to fry: “There are much bigger issues for the RBNZ to consider in terms of the economic outlook and the potential operation of monetary policy but we expect the Bank to stick to its knitting and avoid signalling any change in view until further details emerge,” and ASB forecasts that the Overnight Cash Rate will remain on hold until at least 2019.

RIKSBANK

  • While the Riksbank held rates at -0.50%, the focus was on its tone, which has tilted towards the hawkish end of the spectrum, with the central bank citing a “strong economic activity,” with employment “historically high”) and the higher rate of inflation (“rising rapidly” in services industry). The updated forecasts saw the growth profile raised, as was inflation, though it is still expected to remain beneath forecast but within the target band.
  • “Although we may still be a little way off the Riksbank pushing the button and tightening policy, it appears to be slowly heading in that direction,” HSBC says, and the economy “is primed for tighter policy”. However, there are some areas the Riskbank will likely want to see progress on before triggering rate hikes: “the housing market cooling a bit and inflation is set to slow into early 2018 due to some base effects dropping out,” HSBC says, with the bank expecting the Riksbank will hike in Q2 and Q4 of 2018, lifting rates to 0.00% by the end of 2018. “This may be some way off, but by then we expect the central bank to react to the likely reduction in the ECB's asset purchases and, eventually, the strength of the Swedish economy.”
  • The Riksbank will evaluate its policy on asset purchases in December, it said, with the current programme set to come to an end at the end of 2017. An extension would be seen as additional easing, HSBC says, and the bank sees no reason for this to happen.

NORGES BANK

  • There were little surprises out of the Norges Bank this week, keeping its rates unchanged at 0.50%. “The statement highlighted how capacity utilisation is still assessed to be ‘below a normal level’, and inflation still seen below the 2.5% target ‘over the coming years’,” Citi writes, “although the Norges Bank’s updated short-term models show a lower path for CPI-ATE inflation and only a slightly higher GDP growth rate relative to the September MPR, the it sees risks around the outlook as being broadly balanced – unchanged from last month.”
  • Citi believes that the central bank’s rate path is unlikely to be tweaked at the December meeting. “The conditional interest rate path was raised in September to show a first 25bp rate hike in 3Q-19, rather than the 4Q-19 expected in June, with a 50% probability of it happening as early as 1Q-19.”

SWISS NATIONAL BANK

  • No notable updates this week

Write to Yogesh Chandarana.

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