Central Bank Views

Recent weakness in Swiss franc against the euro has not yet boosted Switzerland's economic outlook in a meaningful way, evidenced by the disappointing KOF indicator and Credit Suisse (formerly conducted by ZEW) investor sentiment index for August. While, at the meeting on September 14, the SNB would certainly affirm the stance that the franc remains "overvalued" and the pledge the combat deflation, we are concerned that there would still be a long way to go for the country's economy to get back in shape, as the pass-through of exchange rate into inflation is subdued. Meanwhile, a recent study by the SNB suggests that its monetary policy would have to stay relatively more accommodative (than ECB's) for longer to push inflation higher. We believe this reinstates the central bank's commitment to leave the policy unchanged.

Recent comments from US Treasury Secretary Steven Mnuchin and Senate Majority Leader Mitch McConnell appeared to have lifted market confidence that the government will eventually be able to raise the debt ceiling and avoid default. While our base case is that a debt ceiling would be suspended or raised, and the government would avoid a shutdown, we do not expect things to go smoothly and it would likely be a last-minute deal. US' politics has been under the spotlight since Donald Trump has become the president. At over 200 days in office, Trump's Russia scandal probably caught most attention, followed by the war of words with North Korean leader Kim Jongun. More recently, Trump dissolved several business advisory councils after resignations of a number of CEOs. On economic achievement, Trump has failed to pass the healthcare reform bill and was unable to kick start any pro-growth or tax policy. The government's debt issue is close watched and volatility of the stock markets could increase as we approach the deadline.

Speeches by ECB President Mario Draghi and Fed Chair Janet Yellen are the key focuses. The market is anticipating Draghi to give more hints on ECB's asset purchases tapering. However, an ECB spokesman indicated last week that Draghi would not deliver a new policy message, but focus on the symposium's theme of "Fostering a Dynamic Global Economy". We believe Draghi would refrain from sending more signals about the policy outlook this week as the ECB is still working on the new economic projections for the September meeting. It would be prudent to wait for the updated economic forecasts and make announcement thereafter.

ECB's July minutes voiced concerns over euro's strength. This is particularly important as the central bank is about to discuss tapering of the asset purchase program. Yet, the members generally agreed that "there was presently a continuing need for steady-handed and persistent monetary policy". The single currency instantly dropped to a 3-week low of 1.1661 against USD, 2-day low of 0.9061 against GBP and 4-day low of 1.1302 against CHF, before recovery.

The price actions in US dollar and Treasuries suggested that the market views the July FOMC minutes as a dovish one. The minutes revealed that policymakers were concerned that US inflation might stay below +2% longer than previously anticipated. On the other hand, it appears that an announcement on balance sheet policy is imminent. The market pricing of a rate hike in December ranges from 35-45%. It only expects less than two times of rate hike through end-2018, compared with four projected in the Fed’s dot plot. US dollar initially climbed higher upon release of the statement. Gains were, however, erased shortly with the DXY index ending the day -0.33% lower. Treasury prices strengthened, sending 2-year yields -3 points lower to 1.33% and 10-year yields -5 points to 2.23%.

Headline CPI in the UK surprisingly stayed unchanged at +2.6% y/y in July, compared with consensus of a renewed pick up to +2.7%. From a month ago, inflation contracted -0.1%, after a flat reading in June. Re-designated by the Statistics Authority on July 31, the consumer price index including owner occupiers' housing (CPIH) steadied at +2.6%. The price of motor fuel continued to fall and contributed to the biggest downward change from June to July. Upward contributions came from a range of goods and services, including clothing, household goods, gas and electricity, and food and non-alcoholic beverages. Core CPI stayed unchanged at +2.4%, missing market expectation of a rise to +2.5%.

RBA's minutes for the August meeting revealed that policymakers were optimistic over the global and domestic economies. However, they reiterated the warning of the strength of Australian dollar, noting that its appreciation would curb growth and inflation over time. The central bank signaled concerns over the housing market and household debt, while appeared more comfortable over the employment situation. AUDUSD recovered after the release of the minutes.

As expected, the RBNZ left the OCR unchanged at 1.75%. Governor Wheeler reiterated that the monetary policy would remain accommodative for some time. The staff projection continued to forecast the first rate hike to come in 2H19. They also revised lower the short term inflation outlook and intensified the warning that a lower currency is needed for growth. NZDUSD jumped to a 3-day high of 0.7371 after the announcement, but gains were erased afterwards.

The BOE left the Bank rate unchanged at 0.25%, the government bond purchases at 435B pound and corporate bond purchases at 10B pound. As we had anticipated, the members voted 6-2 to leave the interest rate unchanged with the newcomer Silvana Tenreyo supporting to maintain the status quo. Ian McCafferty and Michael Saunders continued to believe a +25 bps rate is needed. Sterling slumped after the announcement as the central bank downgraded the growth and wage forecasts. Governor Mark Carney warned that Brexit uncertainty is weighing on the country's economic outlook.

We expect BOE to leave the Bank rate unchanged at 0.25% and the asset purchase program at 435B pound at the upcoming meeting. The vote split might probably come in at 6-2 from 5-3 in June, as Silvana Tenreyro, successor of Kristin Forbes appears less hawkish and noted that the monetary policy decision would be data-dependent. Members favoring a rate hike were mainly hinged on the fact that inflation has been overshooting the central bank's target. However, there was a sign of slowdown on the consumer price level in June, offering room for policymakers to stand on the sideline amidst lackluster economic growth and wage, as well as uncertainty in Brexit negotiations.

As widely anticipated, the RBA left the cash rate unchanged at 1.5%. Policymakers acknowledged that June inflation drifted back below the +2% target but remained confident it would improve gradually alongside the pickup of the economy. Policymakers, however, warned of Australian dollar's appreciation, suggesting that it would limit economic growth. A reference of the negative impact of strong currency on economic developments reappeared as AUDUSD has risen +5.7% from July's low of 0.7567.

The July FOMC meeting came in as widely anticipated. The Fed left its monetary policy unchanged, maintaining the federal funds rate target at 1-1.25%. The Fed made two tweak in the statement, though. First, it noted that balance sheet reduction would begin 'relatively soon', signaling that the official announcement would come in September. Second, policymakers revised lower the outlook on core inflation. US dollar plunged, with the weighted index falling to a 13-month low as the market interpreted the inflation assessment as dovish.

Aussie dropped after the weaker than expected inflation report, as traders took profit after the currency rallied to 2-year against USD and last week. Headline CPI moderated to +1.9% y/y in 2Q17 from +2.1% a quarter ago. The market had anticipated an increase to +2.2%. Key contributors to the weakness were lower automotive fuel prices as global oil prices plunged and the usual seasonal drop in domestic holiday, travel and accommodation prices. RBA's trimmed mean slipped 0.1 percentage point to +1.8%, in line with expectation, while the weighted median CPI climbed +0.1 percentage point to +1.8% in the second quarter. Consumer price levels are an important gauge of central banks' monetary outlook. The dilemma currently facing major central banks worldwide is the continuing economic growth and employment market improvement, alongside subdued inflation. At the July meeting minutes, RBA acknowledged that weak inflation is a global phenomenon with core inflation remaining low while headline inflation turning down..

ECB left interest rates and the QE program unchanged in July. The members also decided to keep the QE reference in the forward guidance. The central bank indicated it would continue buying assets in the market for some time and President Mario Draghi admitted that "inflation is not where we want it to be, nor where it should be" and "that's why a substantial degree of accommodative monetary policy is still needed". The single currency plunged after the dovish statement. However, it reversed to gains and jumped to a fresh 14-month high against USD after Draghi indicated that QE discussion would begin in autumn.

As expected, BOJ left its monetary stance unchanged in July. The central bank voted 7-2 to keep its target for 10-year JGBs at around 0% and its short-term deposit rate at -0.1% as expected. It also maintained the measure to buy government bonds at an annual rate of 80 trillion yen. What is more dovish is that the central bank now forecasts it would take longer than previously anticipated for the economy to achieve the +2% inflation target. It is the 6th time that the central bank pushed back the projected timing for achieving the inflation target. USDJPY has rebounded +0.23% since the announcement.

RBA minutes for the July meeting suggested that policymakers acknowledged the economic growth and the improvement in the labor market recently. The members also discussed the appropriate neutral rate which they believed should be at +3.5%, well above the current cash rate of 1.5%. This heightened market expectations of a potential rate hike in the near-term. As such, Aussie jumped to a 2-year high after the release of the minutes.

As the market had widely anticipated, BOC has increased the overnight rate target, for the first time in 7 years, to 0.75%, from the historical low of 0.5%. The Bank Rate and the deposit rate rose to 1% and 0.5% respectively. Policymakers acknowledged the improvement in macroeconomic data, noting that the central bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy had been improved. Although inflation has remained soft, BOC judged that it is temporary and would reach the target by the middle of 2018.

The minutes for the June ECB meeting turned out more hawkish than expected, sending EURUSD to a 3-day high of 1.1397 and Europe's Stoxx 600 stock index to a 11-week low 378.45. The minutes unveiled that policymakers had discussed removing the guidance on the bond asset purchase program (QE), if necessary. Policymakers just shrugged off recent weakness in headline inflation as core inflation continued to climb higher.

The FOMC minutes for the June meeting unveiled that members were divided over the timing of balance sheet reduction while there was also discussion over the recent inflation weakness. At the meeting, the Fed raised its policy rate, by +25 bps, to a target range of 1-1.25%.Given the fact that the economic and medium-term inflation outlooks was largely unchanged since May, members generally judged that it was appropriate to adopt the continued removal of monetary policy accommodation. The rate hike decision was not unanimous.

RBA left the cash rate unchanged at 1.5% in June. While the decision had been widely anticipated, Aussie slumped after the announcement as the central bank failed to deliver a more hawkish tone as its US and European counterparts did. Policymakers affirmed that Australian economy would continue to grow gradually. Yet, they pointed to the strength in Australian dollar and subdue inflation as key reasons for standing on the sideline. Meanwhile, RBA remained concerned over the overheating housing market.