A Veritable Central Bank Jamboree
The ECB delivered a 25bp rise, surprising some in the market after some of the usual hawks, including Isabel Schnabel, had seemingly started to turn dovish. Accompanying the hike were comments including, “(The Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The markets latched on to this and are now looking forward to the first cut, not the higher for longer inference. Despite the hopes and prayers of many, the first cut is much further away than the markets are anticipating, especially now the ECB has raised its inflation forecasts. As they raised their inflation forecasts, they lowered their growth forecasts, and in doing so, the spectre of stagflation appeared again. It would now appear to be a fair wager that the ECB will eventually be the first to fold, and this view may well explain the desultory performance of the single currency after the hike.
This week, we get the results of the deliberations of the other two central banks that we tend to focus on, the US Federal Reserve and the Bank of England, on Wednesday and Thursday, respectively. In an interview a couple of weeks back, I said that I thought the markets were wrong in dismissing the chances of 25bp hikes from all three banks. Well, one is already in the back of the net, so what odds on the Old Lady and the Fed following suit? Up until last Thursday, the chances of the Fed hiking were indeed pretty slim, but after US Retail Sales rose 0.6% in August (forecast 0.2%), Producer Prices jumped by 1.6% from 1.2% in July, and weekly jobless claims were 220,000 markets are becoming more wary. Add in WTI Oil, which looks like it’s headed north of $100 combined with a slightly stronger CPI and the outcome, announced on Wednesday evening, could be a surprise. What will not be a surprise will be the hawkishness of Jay Powell and the FOMC.
Certainly, King Dollar is back ruling the roost at the expense of both the pound and the euro, and with the US economy so resilient, this is no surprise. The UK economy is holding up better than expected, and on Thursday, we will hear what the Old Lady thinks when attention turns to Threadneedle Street. Until recently, the perceived wisdom on the street was that Andrew Bailey and his merry team on the Monetary Policy Committee would also hike by 25bp. With wage inflation still a problem and shop prices, despite what the authorities say and wish, also rising, this should probably be the case. However, the Old Lady has been less than easy to read, and the MPC was split last month.
Although the Bank of England is independent, it is undoubtedly influenced by political and public opinion. Still, even here, there is a split between tightening to help PM Sunak’s pledge of halving inflation or holding off to help the government fight the Mid Beds by-election. Before moving on, I feel I must clarify the comment about influence. I am not inferring that they will be directly influenced, but it certainly is hard for anyone to read media comments and for them not to influence decisions subconsciously. So, will it be a dovish hike or a hawkish hold and skip? It may all come down to whether August’s CPI, tantalisingly released the day before their decision is announced, is as good as expected. I don’t think the number will be as good as people think, so I am still going for the BoE to complete the threesome! By the end of the week, China, Norway, Sweden and Japan will also have joined the central bank jamboree, so there is a nervy week ahead for the markets. By Friday, policies will be clear, and for all but China, the one thing that won’t change is that higher rates are here to stay for much longer than the consensus is predicting.