Markets
It’s a big week ahead, but we start rather quietly today with August inflation numbers in Czech Republic and Norway. Following last week’s upward surprise in South Korea, we start looking for more evidence of energy becoming an inflationary source again. Brent crude prices moved back above $90/b after Saudi Arabia & Russia’s joint decision to prolong unilateral production cuts by another 3 months (on top of OPEC+ cuts). Given the low comparison base, energy will at least from September on become an issue likely ending the disinflationary trend in headline CPI way before hitting central banks’ inflation targets. It could complicate the ECB & Fed’s catch 22 between stubborn inflation and weakening growth momentum even more and especially more than currently expected in the final quarter of this year. Before we arrive there, we have September updates by the ECB this week and the Bank of England next week. We expect them to both deliver a 25 bps rate hike. European money markets currently discount a 40% probability of a hike, slightly favoring a status quo. Lagarde and co switched to data dependence in July. Both data and speeches delivered by individual ECB members since then provided arguments both for the rate hike and for the rate pause camp. We expect updated inflation forecasts to still show above target inflation over the policy horizon, backing a 25 bps move. Contrary to the US, European real interest rates still hold just narrowly above 0% (0.15% for Germany 10y vs 1.9% for US) suggesting the ECB has more ground to cover. At the press conference, ECB Lagarde can afterwards put the onus on waning growth momentum and the lagged impact of previous tightening efforts to install a pause idea for the October policy meeting and allowing for a new comprehensive review in December. The Bank of England will get some final input from monthly labour market data tomorrow and the CPI next week before deciding on policy. A 25 bps hike is discounted with last week’s testimony before parliament by Bank of England Bailey suggesting caution going forward. Weak growth and the UK labour market becoming less tight are top of the BoE’s mind even as (wage) inflation isn’t under control yet. From a market-moving point of view, we think that Wednesday’s US CPI inflation figures are the real deal. Fed governors massaged another skip at next week’s FOMC meeting with money markets currently attaching a 40% probability to a final 25 bps rate hike in November.
News and views
Asian currencies lead the FX scoreboard this morning. The Japanese yen surges from a close last Friday at USD/JPY 147.83 to 146.05 currently following comments from Bank of Japan governor Ueda. He told the Yomiuri newspaper that there may be enough information to judge whether wages are rising sustainably. Wage growth is critical in the BoJ’s view of inflation hitting the 2% target in the medium term. The central bank considers the current price rally (4.3% in the core gauge) as mostly externally driven and only temporary. Having ultra-easy policy is therefore still necessary, it concludes. Should, however, domestic factor take over as the driving force, ending the era of negative interest rates is one of the options available, Ueda said. Speculation for policy normalization is lifting government bond yields as well. In an attempt to keep surging yields in check, the BoJ this morning also deployed its (bank) loans-for-bonds program by conducting a 5-year operation. The 10-y reference nevertheless adds 5 bps to top 0.7% for the first time since 2014. Ueda gave the interview just as the Japanese yen was nearing the symbolic 150 barrier, a level that sparked massive FX intervention in October of last year.
China’s yuan appreciates from USD/CNY 7.34 to 7.278, marking a blistering start of the new week even as it is still trading near the weakest levels since 2007. The strengthening move came amid three developments. Firstly, it followed in the Japanese yen’s slipstream. Second, after signaling more tolerance vs yuan deprecation last Friday, the PBOC again set a sharply stronger fixing this morning. Finally, the central bank held a foreign exchange mechanism meeting today. The statement after concluding the meeting said that the country’s financial regulators will take action against what it calls one-sided speculative moves in the market. The three strikes were combined with state-owned banks actively selling dollars today, putting a floor below the yuan, at least in the short run.
