FOMC, BoJ, & Norges Bank policy meetings
Next week’s market movers
• The main event will probably be the FOMC policy meeting. Markets may focus on any potential changes to the “dot plot”, as well as the timing of balance sheet normalisation.
• In Japan, the BoJ is likely to keep its ultra-loose framework unchanged once again. That said, we expect a more upbeat tone from policymakers, amid encouraging economic developments.
• The Norges Bank is likely to stay put as well. We suspect officials could appear a bit more concerned, given the latest slowdown in inflation, and could push slightly back the timing of their first planned rate hike.
• We also get key economic data from the Eurozone, the UK and Canada.
On Monday and Tuesday, the economic calendar is relatively light, with no major events or indicators coming out.
On Wednesday, the main event will be the
FOMC policy announcement
. This is one of the “bigger” meetings, meaning that besides the rate decision we will also get fresh economic forecasts for the US economy, an updated “dot plot”, as well as a press conference by Chair Yellen. According to the Fed funds futures, the financial community is almost certain that policymakers will keep interest rates unchanged, and we agree with that given that inflation remained subdued in the aftermath of the latest meeting. Although August’s data showed that both the headline and core CPI rates rebounded, we doubt that just a single data set will be enough to ease the concerns of those policymakers who believe that the latest softness in inflation is not due to idiosyncratic factors.
We believe that the market will place most of its emphasis on any signals regarding the beginning of the balance sheet normalisation. Market chatter suggests that this process may start at this meeting or the next one, in October. As for our view, we don’t expect the Bank to start the process now, but it could provide clear signals that this may happen in October. The risk to that view is officials leaving the language around that subject unchanged. Specifically, they could keep the part saying that the reduction will begin “relatively soon” in order to leave themselves some room for manoeuvring if economic data continue to disappoint.
As for the forecasts, we will mainly focus on the “dot plot” to see whether the Committee as a whole continues to anticipate another rate increase this year. We expect the plot to still signal another hike this year. Although we got increasingly dovish comments last week, these remarks came mostly from members we suspect that they have already indicated they won’t support additional hikes in 2017. As for the pace of future hikes, we believe that they may keep it untouched as well and wait to see whether the latest rebound in inflation will continue. If not, they may revise down the “dot plot” in December.
In the UK, retail sales for August are due out.
On Thursday, during the Asian day, the BoJ policy decision will be in the spotlight. With no forecast available, we see the case for the Bank to keep its QE with yield-curve control framework intact once again, and to appear slightly more optimistic than previously. Economic developments since the latest BoJ meeting have been positive on every front. With regards to inflation, both the national and the BoJ’s core CPI rates rose further in July, while the forward-looking Tokyo core CPI rate for August rose as well, suggesting that this recovery in inflation is likely to continue. Meanwhile, the unemployment rate declined further, while economic growth accelerated.
Given this cocktail of encouraging developments, we think the BoJ is likely to upgrade its language around the Japanese economy, and perhaps even revise up its economic forecasts. That said though, we still think it’s too early for speculation regarding a potential reduction in stimulus in the near-term. Under its current framework, the Bank has explicitly committed not only to achieve its 2% inflation target, but to actually overshoot it. Thus, although the CPI rates rose somewhat, as long as they remain so far away from the target, we doubt any change in policy is looming.
During the European day, the Norges Bank will announce its own rate decision. When it last met, the Bank revised up its GDP forecasts for 2017, and even though it marked down its expectations for near-term inflation, it upgraded them for the long term. Perhaps the most notable change was that the Bank removed its easing bias and now expects the key policy rate to remain at the current level in the period ahead, while it revised slightly higher its expected rate path for 2017 and 2018.
Since then economic data have been mixed. The nation’s GDP accelerated notably in Q2, which is in line with the Bank’s forecast, while the unemployment rate slid further in August. On the other hand, inflation slowed in August, confounding expectations of rising. We don’t expect the Bank to take any action at this meeting, neither to change its language. However, due to declining inflation, officials could push further back the timing of when they expect to start raising interest rates.
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