The week ahead is being billed as Fed Week; it is so much more there are three days of central-bank decisions with multiple interest-rate hikes on their way. First off will be Sweden’s Riksbank on Tuesday, with a likely 75 basis-point hike. Wednesday the Fed is set to raise 75bps also, with a chance of 100bps. Brazil’s central bank is later after the FOMC.
Thursday you get Asian central banks in the Philippines, Indonesia, Japan and Taiwan are all expected to raise rates other than the BoJ. Then in Europe, the Swiss National Bank, Norges Bank, Turkey and the Bank of England. Not to be left out you have got the South Africa Reserve Bank and Egypt may act as well.
In addition, there will be a bunch of ECB speakers over the week including President Lagarde, Schnabel, Muller, Kazaks, Lane, De Cos, Villeroy, Guindos and Nagel, although the next ECB meeting is a long way off on October 27th. RBA minutes on Monday and then Deputy Governor Bullock will speak the next day.
Inflation is the Issue
Riksbank is becoming increasingly more hawkish after red-hot, 30-yr high inflation at 9.8% y/y, SEK depreciation, and the fear of falling behind the ECB as they aggressively tighten rates.
Governor Stefan Ingves conceded earlier this month that after underestimating inflation, small increments in rate hikes may not suffice. He also said that previous guidance for a half-point hike this week is no longer valid. The Riksbank is expected to raise the repo rate by 75 bps to 1.50% with upside risk to that magnitude. A 100 basis-point hike would make Sweden only the second in the Group of 10 jurisdictions with the world’s most-traded currencies to make such a move this year, after the Bank of Canada in July.
The U.S.’s Federal Reserve
The expectation from the market is the FOMC hikes of 75bps this week that would lift the fed funds target range to 3.0 – 3.25%. Markets are priced for this move. There is some speculation for a 100bps rise but that may be considered as too abruptly destabilizing to markets. The move comes after CPI inflation rocking markets last week.
We know heading into the Fed de-risking continued after Fed Chair Powell’s policy speech with uncompromising inflation resolve at the Jackson Hole Economic Policy continued this week but reversed Thursday. On Friday Fed speakers pushed the narrative with Fed Governor Waller (FOMC voter) saying, “I support another significant increase in the policy rate. and “Rough estimate Is that $1 Trillion of runoff is about 25Bps worth of rate hikes.” Kansas City Fed President George (FOMC voter) said that the case for continuing to remove policy accommodation remains “clear-cut.”
Fed Forward Guidance Expectations via Scotiabank
The median FOMC participant is expected to raise the not-forecast forecast fed funds rate range from 3.25–3.5% to over 4% this year and to keep it at this peak through 2023. The addition of 2025 to the forecasts adds a new wrinkle in that how quickly the FOMC sees coming off an overshoot of its estimated neutral rate range over 2024–25 may inform easing bets. Markets are onside in the near-term but less so later on (chart 10). The dots are also unlikely to guide that there may be rate cuts next year, whereas markets are priced for the return of policy easing later in the year. It’s unlikely that the FOMC wishes to signal plans to ease when it has yet to get inflation under control. It’s also unlikely that sending an easing signal that aids financial conditions would be compatible with the goal of bringing inflation under control at this point.
What The Fed Has to Base Decisions On:
Brazil’s Banco Central do Brasil
The BCB raised 50 bps at its August 3rd meeting and provided guidance that it would hold the rate at the next meeting unchanged at 13.75% after a record 12 straight hikes from 2% in March 2021. A minority still think that it may deliver a small hike perhaps informed by the past week’s more aggressive pricing of the Fed funds rate path.
Will Brazil after being among the first to start tightening worldwide in March 2021 also become among the first to finish. The Selic rate will likely be in the 13.75% to 14.00% range and stay there until the end of 2022. Even though inflation has started to show signs of receding, we expect an excess of liquidity ahead of the October presidential election.
Switzerland’s Swiss National Bank
The SNB is the only central bank in the region still with negative rates. However, SNB is expected to follow up last meeting’s surprise 50 bps hike with another 50–75 bps hike that would bring the policy rate to 0.25%–0.5%. Their currency management strategy will also be tested as the Franc has strengthened significantly against the EUR in recent months.
Norway’s Norges Bank
Last month Norges Bank hiked the deposit rate by 50 bps last month, noting that the rate will need to rise further in September. While the magnitude was not specified, market participants are leaning towards another 50-bps hike partly informed by the forward rate path published in the June Monetary Policy Report, which would bring the policy rate to 2.25%. Inflation remains hot and labor markets are still tight in Norway.
The Norwegian krone fell to a more than two-year low Tuesday ahead of the meeting to $10.36 due to investor trepidation that the Fed will raise rates by 100bps as well Brent crude, which accounts for 51% of Norway’s export revenue in 2021, falling to $90 per barrel down from its peaks of $117. Investors are not convinced that this hike will be enough to halt the krone’s decline against the dollar.
The U.K.’s Bank of England
With the new PM Truss just coming to power economists are split on whether the BoE will hike the bank rate by 50 or 75 bps with markets priced by 75 bps and the GBP seeing lows not seen since 1985. Last Wednesday’s inflation for August was down .2% to 9.9% y/y, doesn’t provide much respite, but may be an early indication that the UK government’s energy price cap program may put a lid on the short-term peak inflation level while the outlook for core inflation may have been perversely raised by this effort.
Turkey’s Central Bank of Turkey
Last month The Central Bank of Turkey unexpectedly cut its interest rate by 100bps to 13% with concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy. Inflation continues to soar, eclipsing 80% y/y in August. The economy is desperately in need of rate hikes, but the Erdogan-run central bank doesn’t intend to go that route. The Lira continues to plunge against the US dollar, which will only stoke inflation further as imports become increasingly more costly.
Japan’s Bank of Japan
The BoJ has been the outlier of the major central banks, it is expected to leave the policy rate on hold at -0.10%. With the dollar yen testing 145 last week the main focus is on this past Wednesday’s announcement of the potential intervention by the BoJ in FX markets to prop up the Yen, which has rapidly depreciated in light of policy divergences with the Fed. The BoJ was said to have conducted a ‘rate-check’, which can precede actual intervention although JGB bond buying actions sent a mixed signal.
The BoJ is likely to look through the implications of a weaker yen because it would be viewed as only delivering transitory progress toward the elusive inflation goal. Monday’s CPI update is likely to continue to accelerate toward 3% y/y with CPI ex-fresh food and energy at a more subdued pace of half that rate.
Indonesia’s Bank Indonesia
BI is expected to deliver a second consecutive 25 bps hike of the 7-day reverse repo rate to 4.00%. Headline and core inflation remain elevated and above the bank’s target 2–4% range.
Philippines’ Central Bank of Philippines
BSP rate hike expectations have shifted from 25 bps to 50 after inflation figures, more notably the core gauge, accelerated to 4.6 % y/y in August, up from 3.9% last month, which now brings it well above the bank’s 2–4% target.
The policy rate is supposed to reach the ~4.50% level by Q4-2022/Q1-2023 before it is held there into 2024.
South Africa’s South African Reserve Bank
The SARB committee will likely raise another 75-bps hike of the repo rate to 6.25%. Since November 2021, the central bank has hiked rates a cumulative 200 bps with the cycle expected to end at the 7.00% mark by Q1-2023. Inflation remains stubbornly above the banks 3–6% target range at 7.8% y/y as of July.
From The TradersCommunity Research Desk