Drivers for the Week of September 18, 2022

September 18, 2022
Here's a look at the main drivers in Developed Markets this week.

This is a huge week for central banks. Not only is the Fed expected to hike rates 75 bp Wednesday, but several other major central banks are also delivering higher rates. The Riksbank is expected to hike rates 75 bp Tuesday, while the SNB is expected to hike 75 bp and the BOE and Norges Bank both by 50 bp Thursday. In EM, South Africa, Taiwan, the Philippines, and Indonesia are all expected to hike rate this week. Tighter global liquidity will lead to slower global growth and so the backdrop will remain very negative for risk assets, especially EM. Even though other central banks are hiking, the Fed remains the leader and so the dollar should continue to gain.


The two-day FOMC meeting ends Wednesday with another large hike. Another 75 bp hike is widely expected but WIRP suggests 20% odds of a larger 100 bp move. Looking ahead, the swaps market is still pricing in a terminal rate of 4.5%. Powell’s press conference will be key but we expect no deviation from the hawkish tone he delivered at Jackson Hole August 26 and reinforced at his only follow-up speech September 8. There should be a singular focus on taming inflation and no hints of a pivot.

Updated macro forecasts and Dot Plots will be released. In light of recent data trends, the growth forecasts will likely be tweaked slightly lower while the inflation forecasts will likely be tweaked slightly higher. Most importantly, we expect a hawkish shift in the Dot Plots, with the expected policy rate moving up to 4.0% in 2022 and up to 4.25-4.5% in 2023. For 2024, the expected rate is likely to remain steady in order to underscore that any sort of pivot is not foreseen, at least for now.

September regional Fed manufacturing surveys will continue rolling out. Kansas City reports Thursday and is expected at 5 vs. 3 in August. Last week, Empire came in at -1.5 vs. -31.3 in August and Philly Fed came in at -9.9 vs. 6.2 in August. S&P Global preliminary September PMI readings will be reported Friday. Manufacturing is expected to fall three ticks to 51.2 while services is expected to rise nearly two points to 45.5. Of note, the S&P Global readings have significantly underperformed the ISM readings in recent months. Given what we are seeing in the hard data, we believe ISM better captures the state of the U.S. economy now than S&P Global does.

Other data will be mostly housing focused. NAHB September housing market index will be reported Monday. August building permits and housing starts will be reported Tuesday and are expected at -4.5% m/m and 0.3% m/m, respectively. Existing home sales will be reported Wednesday and are expected at -2.3% m/m vs. -5.9% in July. Q2 current account data, weekly jobless claims, and August leading index will be reported Thursday. Initial claims will be closely watched as they are for the BLS survey week containing the 12th of the month. Last week, claims fell to 213k, the lowest since late May.

Canada reports key data this week. August CPI will be reported Tuesday. Headline is expected at 7.2% y/y vs. 7.6% in July, while core common is expected at 5.6% y/y vs. 5.5% in July. If so, headline would decelerate for the second straight month to the lowest since April vs. the 8.1% peak in June. July retail sales will be reported Friday. Headline is expected at -2.0% m/m vs. 1.1% in June, while ex-auto is expected at -1.0% m/m vs. 0.8% in June. After the weaker than expected August jobs data, markets are on alert for further signs of softness in the Canadian economy.

Bank of Canada tightening expectations have fallen. It's clear from the bank's recent that is moving away from jumbo hikes and is instead seeing how the data come in. Extremely weak jobs data for August certainly justified that decision to become more data-dependent. WIRP suggests a 50 bp hike is fully priced in for the next meeting October 26, while the swaps market is pricing in 75-100 bp of tightening over the next 6 months that would see the policy rate peak between 4.0-4.25%, down from 4.5% earlier this month. New macro forecasts will be released next month’s meeting and will be crucial for forward guidance.


The Bank of England decision was moved to this Thursday due to the Queen’s passing. WIRP suggests a 75 bp hike is nearly 60% priced in, down from nearly 85% at the start of last week. Looking ahead, the swaps market is pricing in 275-300 bp of tightening over the next 12 months that would see the policy rate peak between 4.5-4.75%, up from 4.5% at the start of last week. Last week’s BOE testimony before Parliament was decidedly tepid and so markets will be looking for a much stronger statement of intent this week from Governor Bailey and his colleagues on the MPC. Updated forecasts were just released at the August 4 meeting and so the next update comes November 3.

Other than the BOE, the U.K. has a quiet week. August public sector net borrowing will be reported Wednesday. CBI releases the results of its September surveys. Industrial trends survey will be reported Wednesday. Distributive trades survey will be reported Friday. Preliminary September PMI readings will be reported Friday. Headline manufacturing is expected to remains steady at 47.3, services is expected at 50.0 vs.50.9 in August, and the composite is expected at 49.0 vs. 49.6 in August. If so, this would be the lowest composite reading since January 2021.

Eurozone has a very quiet week. Preliminary September PMI readings will be reported Friday. Headline manufacturing is expected at 48.7 vs. 49.6 in August, services is expected at 49.1 vs. 49.8 in August, and the composite is expected at 48.2 vs. 48.9 in August. If so, this would be the lowest composite reading since January 2021. Looking at the country breakdown, the German composite is expected at 46.1 vs. 46.9 in August and the French composite is expected at 49.9 vs. 50.4 in August. Italy and Spain will be reported with the final PMI readings in early October.

The Riksbank meets Tuesday and is expected to hike rates 75 bp to 1.5%. However, we see risks of a hawkish surprise as WIRP suggests a 100 bp hike is nearly full priced in. August CPI ran hot as headline came in at 9.8% y/y vs. 9.6% expected and 8.5% in July, CPIF came in at 9.0% y/y vs. 8.8% expected and 8.0% in July, and CPIF ex-energy came in at 6.8% y/y vs. 6.9% expected and 6.6% in July. At its last meeting June 30, the bank said it expects the policy rate to be 2.0% by Q2 23. There are typically no updated macro forecasts or rate path at the September meetings but the June rate path is clearly outdated and so we expect a hawkish shift to be unveiled at the November 24 meeting that would move the Riksbank closer to the market. The swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 3.5%.

Norges Bank meets Thursday and is expected to hike rates 50 bp to 2.25%. August CPI eased to 6.5% y/y vs. 7.0% expected and 6.8% in July. This was the first deceleration since January but remains well above the 2% target. At its last meeting August 18, Norges Bank hiked rates 50 bp to 1.75%, as expected, and said that rates “will most likely be raised further in September” without indicating the likely size. Updated macro forecasts and expected rate path will be released this week. Of note, the June rate path saw the policy rate peaking near 3.1% in 2024 vs. 2.5% previously. This is more hawkish than the swaps market, which is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 2.75%.

The Swiss National Bank meets Thursday and is expected to hike rates 75 bp to 0.5%. However, the market is split as nearly half the analysts polled by Bloomberg see a smaller 50 bp move. At the last meeting June 16, it surprised markets with a 50 bp hike to -0.25%, the first hike in 15 years. SNB President Jordan said then that “We do not exclude further rate hikes, but we are also not in the business of forward guidance.” The updated forecasts from June didn’t suggest any rush to tighten. However, the swaps market is pricing 200 bp of tightening over the next 12 months that would see the policy rate peak near 1.75%. Let’s see if Governor Jordan changes his tone a bit with CPI rising 3.5% y/y in August, the highest since August 1993 and well above the 2% target.


The two-day Bank of Japan meeting ends Thursday and no changes are expected. At the last meeting July 20-21, the bank delivered a dovish hold. Governor Kuroda emphasized that “We have no intention at all of raising rates under the yield curve control framework. We also have zero intention of expanding the 0.25% range on either side of the yield target. Right now, we need to continue to tenaciously pursue monetary easing.” A policymaker can’t get any more explicit than that and we maintain our view that current policy settings will be maintained through the end of his term next spring. Kuroda also touched on the exchange rate, noting that “If you were serious about stopping the weaker yen just with rate increases, you would need significant hikes and they would be very damaging to the economy.” Of note, the macro forecasts were updated modestly in July but did not signal a shift anytime soon from its current ultra-dovish stance. Next forecast update will come at the October 28 meeting.

Japan reports August national CPI data Tuesday. Headline is expected at 2.9% y/y vs. 2.6% in July, while core (ex-fresh food) is expected at 2.7% y/y vs. 2.4% in July. If so, core would be the highest since November 2014 and further above the 2% target. Governor Kuroda may have to acknowledge upside risks to the FY22 core inflation forecast whilst stressing that it is likely to return back below the 2% target in FY23. Of note, core ex-energy is expected at 1.5% y/y vs. 1.2% in July. August department store sales will be reported Thursday.

Reserve Bank of Australia minutes will be released Tuesday. At the September 6 meeting, the bank hiked rates 50 bp to 2.35%, as expected. It said that “The Board is committed to returning inflation to the 2–3% range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments.” Similar to the last meeting, the bank said “The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.” WIRP suggests only 45% odds of a 50 bp move at the next meeting October 4, while the swaps market is pricing in only 150 bp of tightening over the next 12 months that would see the policy rate peak near 3.85%, down from 4.35% earlier this month. Since updated macro forecasts were released at the August 2 meeting, we won’t see the next update until the November 1 meeting. Preliminary September PMI readings will be reported Friday.

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