Will the Gnomes of Zurich Make a Comeback?
Hopefully, the central banking fraternity took advantage of the summer’s opportunities to recharge their batteries because they are back in the firing line this week and will be the left, right and centre of the market’s attention. Without a doubt, the most important meetings take place in Washington DC today and tomorrow when the Federal Reserve holds its first committee meeting since the Jackson Hole symposium last month. Indeed, Chairman Powell came out with all guns blazing at that meeting with his eyes firmly on defeating inflation, seemingly regardless of the cost to the economy. He has been joined by nearly all the members of the rate-setting committee in reiterating this wish, and the urgency to do so was increased by the August Consumer Price Index report’s much higher-than-expected inflation print. A move upwards of 75bp seems nailed on tomorrow evening, and the possibility of 100bp is increasing and stands now more than a 20% chance. With further hikes likely in November and December, taking US interest rates above 4%, holding the dollar still looks like a one-way bet, with both sterling and the euro likely to continue feeling the pain.
After months of thumb twiddling by the Bank of England, it faces a moment of truth on Thursday when hopes are it will act decisively. However, we believe it is unlikely to follow the ECB or the Fed in hiking by 75bp and will instead opt for a 50bp move taking the Bank Rate to 2.25%. There is an outside chance of a more aggressive move, no doubt some policymakers on the MPC will vote for it, and the market will be watching closely to see the split of votes. With Liz Truss’s administration acting quickly and introducing an energy price cap, inflation will drop dramatically in the short term; ironically, it will increase price pressures in the longer term. Sterling continued to slide last week, having a dreadful day last Friday on the anniversary of 1992’s Black Wednesday and has continued to fall this week. Admittedly the UK was closed for the state funeral of Queen Elizabeth II. With London, the major foreign exchange trading centre outside of New York, volume was thinner than usual, resulting in higher volatility but trading below 1.1400, as it did yesterday, looks ominous.
Unless there is a decisive move by the Old Lady, in other words, a move of 75bp, sterling is in danger of falling further, particularly against the greenback, which continues to benefit from its safe haven status. There is also a little matter of Friday’s financial statement to contend with, which, if the rumours are correct, could be seen as a loosening of fiscal policy, which will cause more jitters amongst the gnomes of Zurich! All in all, not a happy place for the old lady to be.
We also have the Swedish Riksbank, the Norwegian Norges Bank, the Bank of Japan and the Swiss National Bank meeting. From a European perspective, the Swiss Franc is probably the most influential of the three currencies. With inflation running a little hot in Switzerland and the SNB, unlike most central banks, only holding quarterly meetings appears nothing to stop them from rising by 75bp on Thursday. The Riksbank is also likely to follow the 75bp hiking movement this morning, whilst the Norges Bank will likely move by just 50bp tomorrow.
The euro looks to be side-lined this week with all the central bank action going on around it. The only meaningful data is September’s Consumer Confidence data released on Thursday, which will undoubtedly be a gloomy report and the first take of S&P’s Purchasing Manager’s Indexes on Friday. Despite the lack of economic data, there is no shortage of speakers from the ECB starting this evening with its President Christine Lagarde. There are certainly some political developments going on in Europe, which at some point, may have some negative impact on the single currency. Unusually, moderate Sweden looks set to elect a hard-right government. Italy goes to the polls this Sunday, with a centre-right coalition favourite to win with the Fratelli d’Italia, led by Giorgia Meloni, the key member.
The UK gets back to work today after ten days of mourning for Queen Elizabeth II, now completed, and in closing, we would like to join the entire nation in wishing King Charles III a long and glorious reign.