Saxo Spotlight: Central banks bonanza from Fed to PBOC, BOE and BOJ – Sep 18-22

Fed’s hawkish pause could continue to be dollar positive

US economic data has largely been mixed lately, with disinflation now proving to be bumpy in the final leg of its move to target and labor market showing only very minor cracks for now. Activity data continues to be hot but risks seen rising as high interest rates work through the economy with a lag and start to constrain businesses and consumers. Economist and market pricing suggest that the Fed will still pause at the September 20 meeting, keeping the Fed funds target within the 5.25-5.50% range. However, the fight against inflation doesn’t appear to be over, which suggests that the door for another rate hike will likely be left open, unlike the ECB which appears to be relying on interest rates staying higher at the current levels to bring inflation down. Clearly, economic activity for the US and Eurozone are taking a different path for now, which would allow the two central banks to maintain a divergent rhetoric.

Market pricing for the Fed is however more split for November/December, with 40% odds of another rate hike by the end of the year. Market participants will therefore be watching updated economic projections and the dot plot to see whether another rate hike remains in Fed’s forecasts. That can keep the dollar supported as it will reaffirm US exceptionalism compared to other major economies. Talks of rates being held at terminal levels for an extended period will also provide further legs to the dollar rally. Dovish messages could, however, come from comfort in inflation trajectory, too much weight on lags in transmission or worries about economic momentum beyond Q3. That could push market pricing for rate cuts forward from mid-2024 where the first full rate cut is priced in for now.

China’s Loan Prime Rates expected to be unchanged

With no change to the 1-year Medium-term Lending Facility Rate last week, the 1-year and 5-year Loan Prime Rates are projected to remain unchanged at 3.45% and 4.20%. This week, instead of any additional policy measures, investors may focus on the high-frequency data on property transactions and watch closely for any potential spill-over effect from Zhongrong International Trust which confirmed last Friday that it had been unable to make payments of some trust products and it had entered service agreements to engage Citic Trust and CCB Trust to manage its operations.

Will August UK CPI mark an end to BOE’s tightening campaign?

After a few quiet weeks, focus turns back to the UK this week with August CPI scheduled for release on Wednesday, followed by the Bank of England rate decision on Thursday and August retail sales as well as preliminary September PMIs on Friday. Sterling has faced two consecutive weeks of declines and GBPUSD closed below 200DMA at 1.2433 on Friday, with Eurozone’s stagflation risks pointing towards further headwinds for the UK economy. Consensus expects August headline CPI to increase to 7.1% YoY from 6.8% previously, in-line with trends seen in US and Eurozone partly due to higher energy prices. Core inflation is, however, expected to ease slightly to 6.8% YoY in August from 6.9% YoY previously. Softer-than-expected prints could further bring down the chances of a rate hike at Thursday’s meeting, where a 70% probability of a hike is seen for now. This could weigh on GBP, as Bank of England officials have also been laying the ground for and end of its tightening cycle. But wage metrics and service inflation continue to make the case for more tightening.

It remains to be seen whether the BOE follows the Fed’s potentially hawkish pause or the ECB’s dovish hike path, but any of these are unlikely to support the sterling in a sustainable way as economic headwinds are gathering pace.

Bank of Japan’s Ueda may have the yen in focus

Japan’s August inflation and central bank decision are both due on Friday, and yen volatility cannot be ruled out with USDJPY still hovering close to the 150-mark and Fed likely to keep the door open for more tightening this week. While Japan’s inflation is unlikely to create a clear case for a hawkish pose this week, Ueda’s recent comments to bring forward the policy review timeline have been touted as a support for the Japanese yen. This has brought expectations of the end of the negative interest rate policy to January 2024 from September, but the support for the yen still faded.

Consensus expects Japan’s August headline inflation to tick lower to 3.0% YoY from 3.3% YoY previously but the core-core measure (ex-fresh food and energy) is seen stable at 4.3% YoY. Higher oil prices and a fresh round of fiscal stimulus by the government could however push price pressures higher once again into the end of the year. The Bank of Japan, meanwhile, is expected to refrain from any policy changes after July’s move to widen the 10-year yield target band.

EM easing cycle could get more legs as Brazil central bank cuts again

Emerging market central banks, particularly those in Latin America are leading the easing cycle globally after Brazil and Chile announced larger-than-expected rate cuts in August. Brazil is expected to follow through this week with another 50bps rate cut as inflation remained modest in August and policy remains very tight. But support to BRL from the rate cuts has been modest, despite the commodity boost coming from early signs of a tactical recovery in China.

Earnings – KB Home, FedEx, General Mills

The US homebuilder business maintained its strength throughout the summer. According to a Bloomberg survey, the street consensus anticipates Q3 revenue for KB Home to reach USD1.48 billion, aligning closely with the company's guidance range of USD1.35 billion to USD1.50 billion. The forecasted adjusted EPS stands at USD1.44.

FedEx's FY23 Q1 results might benefit from some freight diversion from UPS, given labor issues at the latter and Yellow's bankruptcy. However, these gains could be offset by weaker consumer spending and fragility in Asian and European freights. The street consensus projects revenue of USD21.85 billion and an adjusted EPS of USD3.74.

For FY24 Q1, the street consensus predicts revenue of USD4.88 billion and an adjusted EPS of USD1.08 at General Mills. Investors will closely monitor the company's update on its targeted 3% to 4% organic sales growth and 4% to 6% earnings growth for FY24.

Earnings this week:

Tuesday: AutoZone (AZO)

Wednesday: FedEx (FDX), General Mills (GIS), KB Home (KBH)

Thursday: Darden Restaurants (DRI), FactSet Research (FDS), Manchester United (MANU)

Key economic events this week:

MON: Japanese Holiday; Canadian Producer Prices (Aug)

TUE: RBA Minutes (Sep); EZ Current Account (Jul), US Building Permits/Housing Starts (Aug), Canadian CPI (Aug)

WED: FOMC, PBoC LPR, BCB Policy Announcements, BoC Minutes (Sep); Japanese Trade Balance (Aug), UK CPI (Aug), Swedish Unemployment (Aug), New Zealand GDP (Q2)

THU: BoE, SNB, Riksbank, Norges Bank, SARB & CBRT Policy Announcements; EZ Flash Consumer Confidence (Sep), New Zealand Trade Balance (Aug)

FRI: BoJ Policy Announcement; EZ/UK/US Flash PMIs (Sep), Japanese CPI (Aug), UK Retail Sales (Aug), Canadian Retail Sales (Jul)