Next Week's Risk Dashboard

• CBs: FOMC, BoE, BoJ…
• …Brazil, Russia, BI, CBCT, SARB
• Brexit stand-off
• NZ pre-election update
• Global macro releases

Chart of the Week

 

A heavy week for global central bank decisions will nevertheless probably hold fire on concrete actions in most cases, but the inclination toward adding further stimulus will put the overall bias under careful scrutiny. The Bank of England may find itself in the most difficult position of all as it mulls possible future easing steps in a week that could be a lively one for additional Brexit developments.

This will also be a notable week for global macro releases across the US, Canada, Europe and Asia.

New Zealand will kick off what is sure to be heightened risk surrounding global fiscal and political developments over coming weeks when it preps voters with fiscal realities ahead of the election on October 17th. Canada may be on watch for advance guidance regarding throne speech contents the following week that may amplify movement toward a potential confidence vote and unlikely election call. Of course, to global markets, the dominant focus will be the US Presidential election on November 3rd.

Set against this backdrop are some tough choices facing governments as they evaluate evidence that they are exiting the peak pandemic phase while beginning to craft policies for the longer roads toward full recoveries that may fully embrace a policy pivot away from stimulus exits. There is unlikely to be a one size fits all solution across countries along this path and it is important to acknowledge that solutions that may fit one macro context could be entirely inappropriate in another.

For example, in a world awash with excess savings and rising income inequality, a post-pandemic recovery phase may be tempted to pursue growth-oriented public policies that redistribute income and wealth toward individuals with higher marginal propensities to consume. The suitability of this approach requires consideration of how individual economies fit into this narrative and not all do.

For instance, it merits observing that a handful of countries seem to account for much of the global savings glut such as savers in Germany and China. Countries like Canada, however, faced a weak saving picture long before the pandemic struck (chart 1). This could mean that seeking to reallocate hoarded saving through redistributive policies might not be appropriate if it further lessens trend saving behaviour and magnifies reliance upon foreign funding. It could also further fan household sector and broad consumption imbalances. There are also substantial differences in income inequality across countries that merit, for instance, not viewing Canada as facing the same challenges as, say, the US or UK among others (chart 2). Thus, a policy bias toward addressing excess saving and income inequality through overt policy measures may suit some countries, but not others and in fact it may backfire in some. Countries that have already long ago chosen paths marked by high twin deficits and soaring external debt like Canada (charts 3, 4) may be further constrained in the options they face without encountering rising external imbalances and associated risks.

 

1. CENTRAL BANKS MOSTLY BUYING TIME

Crack knuckles. Check. Stretches. Check. There we go. Now you’re ready for central bank week! Most of the action to follow will be concentrated on Wednesday and Thursday.

Federal Reserve (Wednesday)

The two-day meeting on Tuesday and Wednesday will culminate in the 2pmET statement and Summary of Economic Projections alongside the dot plot followed by Chair Powell’s press conference a half hour later. No major policy changes are anticipated as the FOMC moves toward rolling out the full results of the strategic review probably toward year-end and after the Jackson Hole delivery of the revised Statement on Long Run Goals and Monetary Policy Strategy.

Key may be the addition of the 2023 forecasts including the extension of the dot plot that may further inform the length of pause between 2022 and the longer run return to neutral. We expect the median dot to show no rate change in 2023 but the dispersion of views may widen. The statement may codify reference to targeting average 2% inflation over time.

The description of current conditions provided by the statement will probably be very similar. The press conference may reveal further discussion of the strategy review but matters such as strengthened forward guidance are not expected to be offered until late year.

Banco Central do Brasil (Wednesday)

BCB is likely to hold its Selic rate at 2% but if it surprises with a reduction then it is likely to be the last of the cycle barring further shocks. Its last decision on August 5th (here) indicated that the easing bias is coming to a close and did not signal urgency by stating “it recognizes that, due to prudential and financial stability reasons, the remaining space for monetary policy stimulus, if it exists, should be small.”

Bank of England (Thursday)

In between a series of macro reports, the Bank of England is expected to remain on hold for now, but its guidance could intensify speculation toward future easing. OIS markets have only a few basis points of a potential cut priced in through to year-end. Key may be signs of dissent in the composition of the MPC vote that may raise easing speculation. CPI headline and core measures are expected to plummet when August readings arrive the day before which could provide cover for a more dovish tone. The BoE may wish to largely stay out of the fray in terms of possible Brexit developments over the course of the week and be more reactive than proactive to possible developments.

Bank of Japan (Thursday)

Other than forecast tweaks, this decision should be largely a non-event with no substantive policy changes expected.

SARB (Thursday)

South Africa’s central bank faces a divided consensus with a little over half expecting a 25bps cut on Thursday. Policymakers themselves have been divided toward whether to ease in prior decisions.

Bank Indonesia (Thursday)

BI is universally expected to hold its seven day reverse repo rate at 4% on Thursday. Currency stability is a key consideration for the central bank. Since early June, the rupiah has depreciated by about 7% to the USD. The central bank is likely to be content with observing the full effects of 200bps of easing since mid-2019, half of which has been delivered this year.

CBCT (Thursday)

Taiwan’s central bank is widely expected to hold again at 1.125% after it unexpectedly held at the prior meeting. The central bank had guided that it had achieved its goal with the cut in March and no further reduction was required in June. Since then, evidence of a nascent global recovery has accumulated.

Russia (Friday)

A slim minority of forecasters expect the Central Bank of Russia to cut its key rate by another 25bps on Friday. If the central bank holds, as most expect, then influencing factors could include a) a 10% depreciation in the ruble to the USD since June, b) mild upward pressure on core inflation this year to 3.1% y/y while headline is running at 3.6% y/y and hence not far from the 4% target, and c) to take stock in the aftermath of the 350bps of easing since about mid-2019.

2. BREXIT RISK

Not that again. We had largely shelved the Brexit saga until later this year when the negotiating deadline is set between the EU and UK. Like an NBA basketball match, the final minute of play was assumed to be where the action would be most intense and with some reason to believe as much given the brinksmanship pattern to Brexit negotiations.

UK PM Johnson had other plans. After a Brexit, the UK was to have had a joint market spanning the whole of the UK with substantial devolution of powers to set regulations granted to Scotland, Northern Ireland and Wales in lieu of Brussels no longer playing a role. Johnson’s Internal Market Bill sought to rebalance this devolution by centralizing more of the powers in such fashion that may have violated the UK-EU Brexit agreement. This would require violating international law through reversing parts of the Northern Ireland Protocol within the EU-UK Withdrawal Agreement. The EU opposed Johnson’s move and delivered a month-end ultimatum to stand down. Unconfirmed reports indicate that Johnson sought to rally his opposing Conservative MPs to support his effort late on Friday. Further developments into the weekend and next week will be closely monitored.

3. NEW ZEALAND’S PRE-ELECTION WATCH

New Zealand’s government will present its Pre-election Economic and Fiscal Update on Tuesday. The Public Finance Act requires that the government submit such an update before the electorate between 20 and 30 working days before a general election so that it can be informed by the government’s position. The COVID-19 shock resulted in the election being pushed back four weeks to October 17th. Stronger lockdown measures are likely to dent the government’s latest projections for recent and near-term GDP growth during Q3 one day ahead of the release of Q2 GDP that is expected to contract at a non-annualized pace of about 12% q/q.

The update is unlikely to be meaningful to Prime Minister Jacinda Ardern’s standing in the polls (chart 5). Her government continues to hold a commanding lead, partly on merit given handling of the COVID-19 shock, but also aided by recent leadership disarray in the main opposition party after its leader resigned less than two months into the job back in July.

 

4. MACRO RELEASES

The global release calendar will be fairly active across multiple markets over the coming week.

The main focus in Canada will be Wednesday’s inflation readings. Headline CPI inflation is expected to be little changed at 0.2% y/y (0.1% prior). The BoC’s core measures will be the ones to watch. The average of the common component, weighted median and trimmed mean inflation readings is expected to hold around the unchanged 1.6% y/y mark and has been at 1.6–1.7% throughout the recovery phase. CPI inflation excluding food and energy fell by more in Canada (0.5% y/y in July) than in the US where the 1.7% y/y reading in August continued upward pressure that has been in place over the past two months. Canada also releases existing home sales during August (Tuesday), manufacturing figures during July that should follow a solid export gain higher (Tuesday) and retail sales for July (Friday) that Statistics Canada’s preliminary guidance pointed toward a muted 0.7% m/m rise in nominal terms.

US industrial and household sector readings will offer up a few gems. Industrial output is expected to continue to benefit from reopening plans with a further but more modest gain in August (Tuesday). The same day’s Empire manufacturing gauge for September will kick off another monthly round of regional measures on the path toward the next ISM-manufacturing print on October 1st. Thursday’s Philly Fed gauge will do likewise. Then it’s all about the household sector amid expectations for a solid gain in August’s retail sales buoyed by autos and core sales (Wednesday), probable moderation in housing starts during August given the prior month’s 23% jump (Thursday), a possible renewed drop in jobless claims (Thursday) and then the University of Michigan’s consumer sentiment reading on Friday.

China may impact market sentiment toward the start of the week. On Monday evening eastern time, China is expected to register growth in industrial output (5% y/y) similar to the prior month and perhaps post the first non-negative reading in year-over-year retail sales growth since the pandemic struck the economy.

Across Asia-Pacific markets, also keep an eye on Indian inflation for August on Monday morning that is expected to be stable at just under 7% y/y with core inflation likely over a percentage point behind. Australian jobs are due out on Wednesday and may showcase faltering momentum after two solid months of gains and based in part upon soft guidance on weekly payrolls from the Bureau of Statistics.

Eurozone releases will be light with just the German and Eurozone readings for the ZEW investor sentiment gauge in September due on Tuesday. This release can garner attention as it kicks off sentiment surveys ahead of the following week’s purchasing managers’ indices and IFO business confidence measures. 

 

 

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