UPCOMING EVENTS:
Monday: Japan/UK Market Holiday, US NAHB Housing Market Index.
Tuesday: Chinese LPR, Japanese CPI, US Housing Starts/Building Permits, Canadian CPI.
Wednesday: FOMC Policy Announcement.
Thursday: BoJ Policy Announcement, SNB Policy Announcement, BoE Policy Announcement.
Friday: S&P Global PMIs for EZ, UK and US.
Last week the main event was the US CPI report. The data came out showing beats across the board leading to heavy risk-off sentiment in the markets. The US Dollar jumped as yields soared and the market started to price in a higher chance of a 100 bps hike coming at this week meeting and a higher terminal rate. The 50 bps move is no longer on the table and it’s just a debate between 75 and 100, with the former being much more probable. This week the main event is of course the FOMC Policy Announcement on Wednesday and it should decide the sentiment for the rest of the month.
Monday: the UK will have a bank holiday as the country pays its respects to Queen Elizabeth II on the day of her funeral. Japan is also on holiday. We will also see the latest US NAHB Housing Market Index, which is expected to contract further as the slowing growth and tighter monetary conditions weigh on the housing market.
Tuesday: the PBoC is expected to keep rates unchanged at 3.65% for the 1-Year Loan Prime Rate and 4.30% for the 5-Year Loan Prime Rate. The PBoC surprised recently cutting rates and another surprising cut should pressure the yuan further.
Japanese inflation figures are expected to show increases on both the headline and core readings. Although, the CPI figures keep on rising, Japanese inflation is still nowhere near the very high readings we have seen in US, UK or Europe. The CPI ex Food and Energy is expected at 1.7% and it shouldn’t cause any reaction from the BoJ.
US Housing Starts/Building Permits are expected to show further contraction as slowing economic growth and tighter monetary conditions are big headwinds for the housing market.
Canadian headline inflation is expected to dip to 7.3% from the previous 7.6% due to cooling energy prices. On the other hand, the core measures are expected to increase as a sign of a broadening of price pressures. The BoC recently hiked rates to 3.25%, and that means that they are already in the restrictive territory according to their estimates. The consensus is for a terminal rate in the 4% area.
Wednesday: after the hot CPI report last week, the FOMC is expected to hike by 75 bps and bring the FFR to 3.00-3.25%. There’s also a little probability of a 100 bps increase, although the debate was always between 50 and 75 move and the Fed never went for a larger out of consensus hike up to now. A 100 bps hike would certainly show that the Fed is not “kidding” and they will do whatever it takes to bring inflation back to target.
We will also get the latest Summary of Economic Projections (SEP) and the Dot Plot. We can expect a downward revision to growth and an upward revision for unemployment for 2022 and 2023. Inflation should be revised higher in 2022 and may be revised lower further out. The Dot Plot is expected to show a year-end FFR at 4.00-4.25% and the terminal rate in the 4.5% region.
Fed Chair Powell Press Conference should be in line with his latest hawkish and resolute message at Jackson Hole. All in all, we can expect a “sell the fact” reaction in the markets if we get everything as expected with US Dollar losing some ground, but general risk aversion in case the Fed decides to go hard and deliver hawkish surprises with the Greenback soaring to new highs. After the event though, the USD should continue to be a “buy on dips”, supported amid the global recession and an aggressive Fed.
Thursday: The market expects the BoE to hike by 75 bps with a year-end rate seen at 3.5%. Inflation in UK continues to climb higher having surpassed already the 10% level. The central bank is expected to keep on its tightening path and dovish leanings would be worse than hawkish ones.
The SNB is expected to hike by 75 bps with some minor chance of a larger 100 bps move. Both moves would bring the rate into positive territory for the first time since 2014. The CHF strengthened a lot since the latest policy announcement when the SNB surprisingly hiked by more than the expected 25 bps move and stated that it would intervene if the Franc would have weakened too much, which is the opposite of what they’ve been doing in the previous years.
The BoJ is expected to keep everything unchanged with rates at -0.10% and yield curve control maintained at 0%. The central bank maintained a dovish stance throughout the year, which is the main cause of the incredibly fast depreciation of the yen, and it’s unlikely to change in the near future.
Friday: We will get the latest S&P Global PMIs for EZ, UK and US. Needless to say, that they are expected to contract further as the global recession keeps on worsening amid low demand, high costs and tighter monetary conditions.
This article was written by Giuseppe Dellamotta.