Macroeconomics: The Day Ahead for 21 September

Central bank Thursday is upon us, as markets digest yesterday’s FOMC meeting, and look to today’s 10 rate decisions and indeed tomorrow’s rather tricky BoJ policy meeting, with markets looking for UK, Norway, Sweden and Switzerland (all +25 bps), and Turkey (+500 bps to 30.0% bps), with rates seen on hold in Egypt, Indonesia, Philippines, South Africa & Taiwan. There are some points of interest on the data schedule, even if they are likely to end up as nothing more than statistical roadkill, these include the overnight UK PSNB, French Business Confidence, South Korea Trade and New Zealand Q2 GDP. Ahead lie Eurozone M3 & Consumer Confidence, while the US looks to Weekly Jobless Claims, Current Account, Philly Fed Manufacturing, Existing Home Sales and Leading Index.

The Fed was distinctly more hawkish than most had expected, above all in raising its dot plot rate projection for 2024 from 4.625% to 5.125%, which was to an extent the natural corollary of lowering its Unemployment Rate and raising its GDP forecasts, despite tweaking its Core PCE deflator forecast lower. It also fits with the narrative of ‘higher for longer’. But with the UAW autoworkers strike ongoing, and the very real threat of a government shutdown in just a few weeks, it is equally understandable that markets are very sceptical about those projections, and the risks look to be skewed firmly to the downside in economic terms.

** U.K. – BoE rate decision **

Following on from the still high, but much lower than expected CPI, paced by falls in food prices, travel recreation easily, which more than outweighed the rise in fuel prices, markets have moved to discount less than a 50% chance of a rate hike today, and while still seeing a small chance of a further rate hike by year end, but overall implying that UK rates have peaked. Given that the cumulative rise in UK rates already amounts to 515 bps, and this is clearly starting to heavily impact the housing market and other parts of the economy, adopting a Fed style ‘patient and cautious’ approach to further policy tightening makes far more sense than hiking rates a further 25 bps. Nevertheless the likes of Mann will doubtless vote for a hike, and may be joined by Haskel, with both likely to point to the continued strength of wage growth, even though this is a lagging indicator, and an additional 25 bps or even 25 bps now is going to have little or no bearing on the trend in wages in the next 6-12 months, particularly as a number of key drivers of wage growth in the UK are structural and not cyclical.

Thus far, the SNB has surprised with a rate hike pause, while maintaining a very clear tightening bias, which given the overall strength of the CHF for much of this year, as well as clear signs that inflation is easing, and the economy is slowing makes good sense. By contrast both Norges Bank and Sweden’s Riksbank hiked rates 25 bps as expected to 4.25% and 4.0% respectively, but the message from Norges Bank was more hawkish, raising its rate trajectory to include one more hike, while the Riksbank was unsurprisingly more cautious edging up its rate trajectory by just 5 bps, primarily one would assume to lean against markets making any moves to discount a rate pivot. Clearly rate paths in Europe are starting to diverge a little, which some will view as an opportunity to exploit potential rate differentials, but the fact remains that most developed world central bank rates are clearly at or very close to a peak at restrictive levels, and unlikely to be coming down any time soon.

In passing, it is well worth noting the better than expected French Business Confidence survey, paced above all by an unexpected uptick in Manufacturing Confidence, which masked a further downturn in Retailer Confidence, which imparts some upside risks to tomorrow’s PMIs. The question is whether this is just a one off and specific to France, or whether it signals a broader trough in the Euro area manufacturing sector, anecdotal evidence from Germany suggests not.