Give me a FOMC, BOE, BOJ and SNB By Reuters
© Reuters. FILE PHOTO: Buses pass the Bank of England (BoE) building after the BoE became the world’s first major central bank to hike rates since the coronavirus disease (COVID-19) pandemic, London , Britain, December 16, 2021. REUTERS/Toby Melville/File Pho
It’s been a busy week for central banks, with the US Federal Reserve set to make its second consecutive rate hike of half a point (at least) to bring inflation under control.
Britain and Sweden are likely to raise interest rates again, while Switzerland could be preparing to join the rate hike club. On the other hand, the Bank of Japan should confirm that its ultra-dovish positioning remains solid.
Here’s a preview of the week ahead with Ira Iosebashvili in New York, Kevin Buckland in Tokyo and Sujata Rao, Julien Ponthus and Dhara Ranasinghe in London.
1/ THINK BIG
It’s time to go big or go home in the battle to rein in inflation. On Wednesday, the Federal Reserve is likely to raise interest rates another 50 basis points (bps) and Friday’s searing US inflation numbers fueled concerns over a more aggressive move.
The Fed’s confidence in its ability to crush the highest inflation in decades without tipping the US economy into a recession will come under scrutiny.
The labor market is holding up well and Wednesday’s retail sales data could show how consumers are faring as borrowing costs rise. Analysts are expecting a 0.2% monthly increase in retail sales in May. A large retailer cuts its margin outlook.
Also watch the Fed’s projections for rate moves in the so-called “dot chart.” Unexpected and aggressive rate hike projections could weigh on US Treasuries, with 10-year yields climbing back above 3%.
2/ NO, DON’T GO THERE (AT ALL)
There is no doubt that the Bank of Japan will stick to its big stimulus guns on Friday, with Governor Haruhiko Kuroda repeatedly re-engaging in ultra-loose monetary policy in recent days.
But the pressure to change tactics is growing. Being the only dove in the G-10 means constantly fending off a global wave of rising yields. The Japanese 10-year bond yield regularly comes up against the BOJ’s tolerance ceiling, 25 basis points north of 0%.
Pinning it there is expensive and a casualty is the yen. Widening yield differentials sent the currency to multi-decade lows.
Energy imported from Japan has become expensive, crushing consumers and businesses at a sensitive time as crucial upper house elections loom this summer. Kuroda didn’t help matters by suggesting that households were becoming more tolerant of rising prices, forcing rare excuses.
3/ A CRUEL SUMMER
Inflation nearing double digits, the worst cut in the cost of living in decades and planned strikes threaten a summer of discontent in Britain. The OECD predicts zero growth next year, the weakest performance of any G20 economy – except Russia.
But on June 16, the Bank of England will likely raise rates for the fifth time since December. Monday’s data showed Britain’s economy contracted unexpectedly in April. Employment figures are due on Tuesday. As a reminder, unemployment in the first quarter hit its lowest level in 48 years at 3.7%. But adjusted for inflation, wages fell 2% from a year earlier, the biggest drop since 2013.
Meanwhile, Prime Minister Boris Johnson, whose authority has been shaken by a confidence vote that revealed the degree of dissatisfaction with his leadership within his ruling Conservative party, continues with his promises to ” fiscal firepower” and plans to change some post-Brexit rules on trade with Northern Ireland. The first risks exacerbating inflation, while the second risks fueling tensions with the European Union.
4/ INFLATION BUG
Switzerland has caught the inflation bug, having seen prices rise in May the biggest in nearly 14 years. This could mean that the days of deep negative rates are numbered.
The Swiss National Bank may not change its interest rate of -0.75% – the lowest in the world – at its meeting on Thursday. But price pressures and the prospect of an ECB rate hike in July are persuading some rate officials to change their dovish stance.
The strength of the franc has somewhat curbed inflation and the SNB has moderated sales of francs. Still, it could soon join the rate-hike club, after seeing hitherto dovish peers like Sweden’s Riksbank turn around.
After raising rates in April, the Riksbank could do so again on Friday, with a chance of a 50 basis point move.
French President Emmanuel Macron faces an uphill battle to secure an outright majority in parliament that would allow him to govern with a free hand after a strong showing from a new leftist alliance in Sunday’s first round of elections.
A lot has changed since her 58% victory over far-right candidate Marine Le Pen on April 24.
Early estimates from Elabe put far-left veteran Jean-Luc Melenchon’s NUPES bloc neck and neck with Macron’s Ensemble (Ensemble) alliance in the first round, with 26.20% and 25.8% respectively.
Failure to achieve an absolute majority would be a major setback, forcing Macron to expand his alliance or face the uncertainty of governing without a majority.
The larger the alliance, the more complicated reaching agreements and making political decisions becomes. Some political risk would arise as investors reconsider the premium paid for French assets.