Macroeconomics: The Day Ahead for 21 September

  • All eyes on the Fed, but Putin partial mobilization a reminder of the ever present threat of geopolitics; digesting UK PSNB, Korea Trade; awaiting South Africa and US Existing Home Sales; Brazil rate decision; German 10-yr, earnings from General Mills and Lennar
  • Fed seen hiking 75 bps, focus on dot plot and forecast updates; Powell likely to underscore ‘single mandate’ focus on inflation remains, and data dependence
  • Brazil rate decision: BCB seen on hold as inflation pressures start to ease, taking stock as election looms
  • BoJ seen sticking resolutely to super easy monetary policy; focus on moves to transform Covid corporate credit support programme into CapEx incentive supporting govt fiscal measures

EVENTS PREVIEW

The much anticipated Fed FOMC day is finally here, and the day’s modest run of data – South Korea Sept 1-20 Exports, UK PSNB & CBI Industrial Trends survey, South African CPI and US Existing Home Sales and MBA Mortgage Applications is unlikely to offer much in the way of distraction. There are also a smattering of central bank speak, th first of two days of US ‘big bank’ CEO testimony to Congrees, and rate decision in Brazil. Earnings from food producer General Mills and homebuilder Lennar should attract some attention, while Germany sells 10-yr, for which a fairly fat concession has been factored in after the recent spike in yields. Putin’s announcement of a partial mobilization of Russia’s armed forces has been speculated upon for more than a week, and while partial mobilisation looks to be a compromise that recognises that full mobilisation would be deeply unpopular and undermine his authority, the more important aspect is that it changes this from a ‘special military operation’ to an effective war footing. Per se, it does increase the risk of ‘tactical’ (a misnomer if there was one) nuclear weapons.

** U.S.A. – FOMC rate decision **

Last week’s US CPI data fomented some speculation about a 100 bps Fed rate hike, which is currently seen as a 19% probability, with the consensus expecting 75 bps to 3.00-3.25%. But having already raised the rate hike pace up to 75 bps (from prior 50 bps) in June and July, and then ratcheting up to 100 bps this week would have more than a whiff of desperation about it. Given that financial conditions are at or close to their tightest levels since mid-2020 (see chart), this might be the trigger for a much sharper tightening in conditions that sends risk premia much higher, and thereby constricts the Fed in its inflation fight. There will also be a new ‘dot plot’ and updated FOMC forecasts, which will as ever attract attention in terms of the message that they send on the rate trajectory and the economy. But both the statement and Powell’s press conference will likely re-emphasize data dependence, an effective ‘single mandate’ resolve to bring down inflation, a very tight labour market, even if markets may well construct some comments as indicating a willingness to ease up on policy tightening in coming months. Markets are now pricing in an additional 125 bps of rate hikes in total to 4.25-4.50%, with the peak seen in February, and a reversal only seen in September 2023.

** Brazil – BCB rate decision **

After a cumulative 1,175 bps of rate hikes in the past 18 months, Brazil’s BCB is seen on hold at 13.75%, with inflation clearly starting to turn lower on a combination of base effects and govt measures to reduce energy prices, and with the presidential election looming, the BCB has the leeway to step back and take stock of the impact of its policy tightening, and await the results of the election and how fiscal policy may change.

** Japan – BoJ rate decision **

While Japan’s Finance Ministry and the BoJ are becoming more vociferous about JPY weakness, this is not expected to prompt the BoJ to offer even the slightest hint that it might row back on its super easy monetary policy, even if the official end of its Covid corporate credit support programmes does occur as expected. That said, this may prove to be more of a migration to a programme that is designed to support private CapEx, thus complementing the government’s upcoming package of fiscal stimulus measures.

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