Market Brief: Volatility crumples into central bank deluge

Measures of market turbulence are falling ahead of a slew of central bank decisions, suggesting that investors feel confident in rates nearing a peak for the current cycle. Over the coming days, the Federal Reserve is expected to stay on hold and adjust its “dot plot” projections to show rates remaining high for longer. Another hike from the Bank of England is narrowly favoured in fixed-income markets, but growing signs of economic weakness could push the vote and accompanying statement in a more dovish direction. The Bank of Japan is considered unlikely to change its policy settings, with traders instead focusing on Governor Ueda’s verbal gymnastics as he attempts to downplay last week’s (perhaps unintended) hawkishness while working to stabilize the exchange rate. Policymakers in Brazil, Indonesia, Norway, South Africa, Sweden, Switzerland, Sweden, Taiwan, and Turkey will also deliver decisions, with most turning more cautious in the face of slowing activity levels. 

The dollar is retreating in cautious trading against its commodity-linked counterparts, while the euro and pound tread water. Equity futures are positioned for a soft open and Treasury yields are flat as investors keep a wary eye on funding negotiations among House Republicans and strike demands from members of the United Auto Workers union. 

Oil prices are still pushing toward the $100 mark after Saudi Arabia’s energy minister said the kingdom’s production cuts are “not about jacking up prices,” arguing that the “jury is still out” on how global demand will evolve in response to higher interest rates and Chinese stimulus efforts. The global benchmark Brent topped the $95 threshold this morning, and barrels of West Texas Intermediate are exchanging hands for more than $92. Inflation breakevens appear largely unresponsive so far, with rates traders expecting the impact on broader prices to fade over time, leaving central bank policy trajectories effectively unmoved. 

The Canadian dollar is inching upward ahead of this morning’s August inflation print, with the data expected show headline prices rising 3.8 percent relative to last year, up from 3.3 percent in the prior month on a jump in energy prices. An average of the Bank of Canada’s preferred core measures is seen ticking up to 3.7 percent. Yesterday’s surprisingly strong housing starts number helped bolster confidence in underlying consumer demand, but odds on a hike at the central bank’s October meeting are still holding near the 30-percent mark. 

Still Ahead

TUESDAY

Canadian inflation numbers for August are likely to exhibit many of the same trends as seen in their US equivalents, with rising energy prices bolstering the headline print even as the Bank of Canada’s preferred core measures hold steady. The data are unlikely to shift interest rate projections in the near term, with monetary policymakers expected to remain on hold for a prolonged period. We think markets will eventually move the number of expected rate cuts in 2024 into closer alignment with the Fed, but price dynamics are unlikely to provide the catalyst - growth will. (08:30 EDT)

WEDNESDAY

On a headline basis, British consumer price inflation likely followed its American equivalent higher in August. Frustrating aspiring doves at the Bank of England, core price growth is seen running at 6.8 percent year-over-year, down from 6.9 percent in the prior month, but still far above target and well beyond historical averages.  (02:00 EDT) If recent history is any indication, minutes taken during the Bank of Canada’s latest policy meeting are unlikely to rock markets. Canadian central bankers tend to be more consensus-driven, and post-meeting communications have improved substantially, with Tiff Macklem’s recent Economic Progress Report providing clear insight into the decision process. (13:30 EDT) With even the most hawkish members of the Federal Open Market Committee making the case for a September pause in the last month, odds on a rate hike are as close to zero as they’re ever likely to get. A final 2023 move should remain on the “dot plot” summary of economic projections, but recent data would suggest that next year’s core inflation expectations will come down even as growth is revised upward. If this proves incorrect, with median inflation expectations punching above the 4.7 percent mark, investors could be forced to reappraise bets on rate cuts by mid-2024. (14:00 EDT) 

THURSDAY

With wage pressures continuing to rise, the Bank of England is likely to deliver a well-telegraphed quarter-point hike, but could begin to shift forward guidance in a more dovish direction. To a significantly greater degree than its continental counterpart, the Bank is facing a stagflationary outlook, with labour market conditions worsening and the economy showing clear signs of falling into recession. We think policymakers could signal an imminent peak in rates by highlighting growing downside risks and downplaying the marginal gains to be achieved through further tightening. (07:00 EDT)

FRIDAY

The Bank of Japan is overwhelmingly expected to keep its major policy settings unchanged, but markets will focus on what Governor Ueda does to counter the yen’s weakness. In an interview last weekend, he appeared intent on jawboning the currency higher, seemingly suggesting that the central bank could lift rates out of negative territory by year end. That seems unlikely - domestic demand is weak, wage demands are running out of steam, and price pressures remain  largely limited to exchange rate-sensitive imported-goods sectors. Hawkish talk is to be expected, but hawkish action remains significantly less probable. (approximately 02:00 EDT) 

See our Economic Calendar for a more complete listing of upcoming data releases.