Central bank decisions could create plenty of volatility

Markets have made a mixed start to what could be a potentially pivotal week that includes the long-awaited September FOMC and the Bank of Japan policy meetings.

A national holiday in Japan today is keeping volumes light while markets in other parts of Asia return following local holidays last week. 

There has been muted reaction to the weekend bombings in New York, with the dollar marginally softer while gold and the precious metals are slightly better bid.

Central bank policy will be a major focus this week. The FOMC committee, which meets from Tuesday, will announce policy along with its latest economic projections on Wednesday.

Hawkish rhetoric from various Fed officials in recent weeks has led to a modest increase in expectations the Fed will raise interest rates by 25 basis points to 0.75 percent.

But the market has been quick to discount rate expectations over the past week following comments from Fed doves, notably Federal Reserve governor Lael Brainard, who suggested the Fed needs to act with “prudence” and added negative interest rates “merit further assessment”.

Odds on a 25-bp increase this week have dropped – the CME FedWatch Tool implies just a 12-percent probability, down from 24 percent ahead to the August payrolls reading. Fed futures now imply a 40-percent probability of a December increase, down from 46 percent at the end of last week.

We maintain our view that, having missed the opportunity to raise rates in July, the Fed will probably wait until December before doing so to cushion against any election shocks.

The Fed meeting also coincides with the BoJ policy setting meeting. Despite the aggressive and unconventional monetary policy the central bank is deploying, growth and inflation remain elusive.

This has led to speculation that further and more aggressive measures are needed, with some expecting the central bank to announce further stimulus this week, pushing rates more deeply into negative territory and increasing asset purchases.

But there are signs of division among committee members on whether further easing is necessary, while recent comments from governor Haruhiko Kuroda suggest they could be considering more unconventional steps.

The yen, along with JGB yield, are likely to prove particularly volatile this week. In general, the yen has rallied when the Bank of Japan has opted to maintain policy.

Other central bank meeting this week include the Reserve Bank of New Zealand, which is expect to hold rates at two percent. The RBA will publish the minutes of its September 6 meeting on Tuesday. Bank of Canada governor Stephen Poloz is due to speak Tuesday and ECB president Mario Draghi and RBA governor Glenn Stevens will speak on Thursday.

While monetary policy is set to dominate, data could still lend direction this week.

The NAHB housing market index on Monday and building permits and housing starts on Tuesday will give a steer on the health of the US construction sector. Housing starts unexpectedly accelerated in July to the fastest pace in five months, a sign the construction sector is responding to the recent jump in new home sales, which reached their fastest rate in nearly nine years in July. Existing home sales figures are also due on Thursday.

Various flash service and manufacturing PMI readings are scheduled for release on Friday.

European data will be under scrutiny for Brexit-related fallout. Japanese data will be monitored for signs the massive 28.1-trillion-yen fiscal stimulus package announced last month is beginning to be felt.  The manufacturing gauge from the US will also be under scrutiny after the final PMI reading for August slipped to 52.0 from the flash reading of 52.1 and compared with 52.9 in July.

In market-specific data, study group figures from the ICSG, the INSG and the WBMS are expected this week. Third Wednesday will also take place this week, with the September positions becoming prompt.

 

Date	Currency	Economic Agenda	Actual	Expected	Previous
Monday       19 Sep	GBP	Rightmove HPI m/m	0.70%		-1.20%
	JPY	Bank Holiday
	EUR	Current Account		27.2B	28.2B
	EUR	German Buba Monthly Report
	USD	NAHB Housing Market Index		60	60
Tuesday     20 Sep	AUD	CB Leading Index m/m			0.10%
	AUD	Monetary Policy Meeting Minutes
	AUD	HPI q/q		3.10%	-0.20%
	CHF	SECO Economic Forecasts
	EUR	German PPI m/m		0.10%	0.20%
	USD	Building Permits		1.17M	1.14M
	USD	Housing Starts		1.19M	1.21M
	CAD	BOC Gov Poloz Speaks
Wednesday     21 Sep	JPY	Trade Balance		0.50T	0.32T
	AUD	MI Leading Index m/m			0.10%
	JPY	BOJ Press Conference/Monetary Policy Statement
	GBP	Public Sector Net Borrowing		10.5B	-1.5B
	GBP	BOE Quarterly Bulletin
	CHF	SNB Quarterly Bulletin
	CNY	CB Leading Index m/m			0.70%
	USD	Crude Oil Inventories			-0.6M
	USD	Federal Funds Rate/FOMC Statement		<0.50%	<0.50%
	USD	FOMC Economic Projections
Thursday      22 Sep	NZD	Official Cash Rate/RBNZ Rate Statement		2.00%	2.00%
	AUD	RBA Gov Stevens Speaks
	JPY	Bank Holiday
	EUR	ECB Economic Bulletin
	GBP	FPC Statement
	GBP	CBI Industrial Order Expectations		-5	-5
	USD	Unemployment Claims		261K	260K
	EUR	ECB President Draghi Speaks
	USD	HPI m/m		0.30%	0.20%
	GBP	MPC Member Cunliffe Speaks
	EUR	Consumer Confidence		-8	-9
	USD	Existing Home Sales		5.45M	5.39M
	USD	CB Leading Index m/m		0.00%	0.40%
	GBP	BOE Gov Carney Speaks
	GBP	MPC Member Forbes Speaks
Friday            23 Sep	JPY	Flash Manufacturing PMI		49.3	49.5
	JPY	All Industries Activity m/m		0.20%	1.00%
	EUR	French Flash Manufacturing PMI		48.4	48.3
	EUR	French Flash Services PMI		52	52.3
	EUR	German Flash Manufacturing PMI		53.2	53.6
	EUR	German Flash Services PMI		52.2	51.7
	EUR	Flash Manufacturing PMI		51.5	51.7
	EUR	Flash Services PMI		52.8	52.8
	CAD	Core CPI m/m		0.20%	0.00%
	CAD	Core Retail Sales m/m		0.50%	-0.80%
	CAD	CPI m/m		0.10%	-0.20%
	CAD	Retail Sales m/m		0.20%	-0.10%
	EUR	Belgian NBB Business Climate		-2.6	-3.1
	USD	Flash Manufacturing PMI		52.1	52

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