- The dollar comes into this key week with strong upward momentum; two-day FOMC meeting ends with a decision Wednesday; new macro forecasts and Dot Plots will be released; Fed regional manufacturing surveys will continue to roll out; the House is scheduled to vote on the debt ceiling this week
- Riksbank is expected to deliver a dovish hold Tuesday; Norges Bank is expected to hike rates 25 bp to 0.25% Thursday; SNB and BOE both likely to deliver dovish holds Thursday; U.K. data this week could give us a clearer picture of the economy as we move into Q4
- Two-day BOJ meeting ends with a decision Wednesday; Japan reports some key data this week; RBA minutes will be released Tuesday
The dollar comes into this key week with strong upward momentum. Six major central banks meet this week and are likely to underscore the monetary policy divergence theme that we believe favors the dollar. The U.S. economy remains firm and wage and price pressures are rising and so the Fed should feel comfortable with its ongoing path to tapering. Norges Bank is likely to become the first major central bank to tighten. On the other side, SNB, Riksbank, and BOJ were all fighting deflationary risks before the pandemic and will be reluctant to remove accommodation anytime soon. The BOE falls somewhere in between. While many expect BOE lift-off in early 2022, we are skeptical as the weak data continue to pile up. We are hopeful that with all this event risk, markets are finally jolted out of recent ranges.
The two-day FOMC meeting ends with a decision Wednesday. No change in policy is expected but we expect a hawkish hold as the official statement and the minutes should continue to lay the groundwork for tapering this year. The Fed is likely to wait until the November 2-3 meeting to make an official tapering announcement, with a likely start in December. Consensus sees the Fed starting to taper in late 2021 or early 2022 and then starting to hike rates in early 2023, which are ultimately dollar-supportive if underpinned by an economic recovery and not just rising inflation and inflation expectations.
New macro forecasts and Dot Plots will be released. According to the Fed’s June projections, it will have met its dual mandate by the end of 2023 and the new projections should continue to underscore this with some modest upgrades. Of note, 2024 will be added to the forecast horizon this week and will be another crucial part of the Fed’s forward guidance.
Recall that in the June 15-16 Dot Plots, seven FOMC members saw the first hike in 2022 vs. four in March. This shift was enough to move the median expectations for lift-off forward into 2023. This week’s Dot Plots will be very interesting, as we suspect that more than seven will see the first hike coming in 2022. If another three policymakers move their lift-off expectations up to 2022, then the median will also shift forward to 2022. The Fed Funds futures strip shows solid odds for the first hike starting in Q4 22. Those odds quickly jump to being nearly fully priced in Q1 23. Similarly, Bloomberg consensus sees the policy rate at 0.25% until Q3 22, when odds of a hike start rising and become nearly fully priced in Q1 23.
Fed regional manufacturing surveys will continue to roll out. Kansas City reports Thursday and is expected at 25 vs. 29 in August. Last week, Empire and Philly Fed surveys surprised to the upside at 34.3 and 30.7, respectively. Preliminary September Markit PMI readings will also be reported Thursday. Manufacturing is expected at 60.8 vs. 61.1 in August, while services is expected at 55.0 vs. 55.1 in August.
Other minor data round out the week. August building permits (-1.8% m/m expected) and housing starts (1.0% m/m expected) will be reported Tuesday, along with Q2 current account data (-$191 bln expected). Existing home sales (-1.9% m/m expected) will be reported Wednesday. August Chicago Fed National Activity Index (0.50 expected) and leading index (0.6% m/m expected) will be reported Thursday. New home sales (0.3% m/m expected) will be reported Friday.
The House is scheduled to vote on the debt ceiling this week. House Majority Leader Hoyer said it would also vote on a stopgap spending measure to keep the government operating past the end of the current fiscal year September 30, but no date has been set yet. Treasury Secretary Yellen called on Congress to raise or suspend the debt ceiling, warning that “the overwhelming consensus among economists and Treasury officials of both parties is that failing to raise the debt limit would produce widespread economic catastrophe.” For now, Republican leaders are refusing to support such a move, which the Democrats need to reach the magic number of 60 votes in the Senate to pass. Stay tuned.
Eurozone has a quiet week. Preliminary September Markit PMI readings will be reported Thursday. Headline manufacturing is expected at 60.4 vs. 61.4 in August, services is expected at 58.5 vs. 59.0 in August, and the composite is expected at 58.5 vs. 59.0 in August. German IFO business climate survey will be reported Friday. Headline reading is expected at 98.9 vs. 99.4 in August, with expectations expected at 96.5 vs. 97.5 in August and current assessment expected at 101.8 vs. 101.4 in August.
Riksbank is expected to deliver a dovish hold Tuesday. At its last meeting July 1, the bank noted progress but warned that “the pandemic is not over, and there are new variants of the virus that are creating uncertainty with the risk of setbacks.” We expect rates will be kept steady at 0.0% and QE will be maintained at SEK700 bln, with unchanged forward guidance that QE will be fully utilized by the end of 2021 and that its size will be maintained at least until end- 2022. The flat rate path is likely to be extended by another quarter to Q4 2024.
Norges Bank is expected to hike rates 25 bp to 0.25% Thursday. If so, it would be the first major central bank to hike rates. At its last meeting August 19, the bank affirmed its forward guidance that it would “most likely” hike rates in September. Nothing has happened since then to change that outlook. New macro forecasts and an updated rate path will be released this week. The June rate path saw the policy rate at 0.1% at end-2021, 0.8% at end-2022, 1.3% at end-2023, and 1.5% at end-2024. Since the June meeting, Governor Olsen has suggested that the bank could hike rates 25 bp per quarter, which was much more hawkish than what this rate path would suggest and so we look for a steeper path this week. Such forward guidance will be key for determining the likely pace of the tightening cycle.
Swiss National Bank is likely to deliver a dovish hold Thursday. After falling from 1.10 in early June to 1.07 in mid-August, EUR/CHF has risen in recent weeks and is basically unchanged from the last meeting June 17, when the SNB characterized the franc as “highly valued” and pledged to continue FX interventions “as necessary.” We don’t think the SNB will do anything to rock the boat at this time. Inflation forecasts should be tweaked modestly higher but the underlying message will be that the policy rate is likely to remain at -0.75% for the foreseeable future.
Bank of England is likely to deliver a dovish hold Thursday. Recent softness in the real sector data and the expiry of the jobs furlough program this month should keep the bank in cautious mode. At the August 5 decision, new inflation forecasts were released that suggested no hurry to hike and no need to hike aggressively. Saunders dissented in favor of reducing QE then but he has since sounded dovish, saying any rate hikes next year will be limited. 2024 will be added to the forecast horizon with the next update to the macro forecasts with the next decision November 4 and should add to the BOE’s dovish message.
U.K. data this week could give us a clearer picture of the economy as we move into Q4. Preliminary September Markit PMI readings will be reported Thursday. Manufacturing is expected at 59.0 vs. 60.3 in August, services is expected to remain steady at 55.0, and the composite is expected at 54.5 vs. 54.8 in August. CBI releases the results of its September surveys. Industrial trends survey will be reported Tuesday and the distributive trades survey will be reported Friday. Both are expected to soften from August.
The two-day Bank of Japan meeting ends with a decision Wednesday. It is likely to deliver a dovish hold, just as it did at the last policy meeting July 16. New macro forecasts were unveiled then and the bank saw targeted core inflation at 0.6% (0.1% in April) for FY2021, 0.9% (0.8%) for FY2022, and 1.0% (1.0%) for FY23. The bottom line is that core inflation is seen remaining well below the 2% target through FY23. As such, the BOJ has signaled that it intends to keep policy accommodative until FY24 at least. The BOJ is on hold for the foreseeable future as markets await the next fiscal package. We do not believe monetary policy will be impacted by the upcoming change to the LDP leadership.
Japan reports some key data this week. August national CPI will be reported Friday. Headline is expected to remain steady at -0.3% y/y, while core (ex-fresh food) is expected flat y/y vs. -0.2% in July. Preliminary September Markit PMI readings will also be reported Friday, along with August supermarket and department store sales. The economy has held up better than anticipated so far in Q3 but it’s way too early to sound the all clear.
RBA minutes will be released Tuesday. At this month’s meeting, the bank commenced tapering but delayed its review of QE until February from November previously. Governor Lowe later pushed back against market expectations of RBA lift-off in late 2022 or early 2023, reaffirming the bank’s forward guidance for 2024 at the earliest. As such, we expect the minutes to come in on the dovish side. August leading index will be reported Wednesday, while preliminary September Markit PMI readings will be reported Thursday.