BoE and FOMC amongst market movers for the week ahead - Rabobank

Analysts at Rabobank suggest that we have a very busy week ahead of us with plenty of risk events, including interest rate decisions by major central banks, key data, and the grand finale of The Apprentice with President Donald Trump posting a short video on social media saying he has “someone very special in mind” for the Fed Chair who would “hopefully do a great job” and that “everybody will be impressed.” 

Key Quotes

“Previously Mr. Trump said that he will decide by 3 November who will lead the Fed. The president is reportedly leaning toward appointing Federal Reserve Governor Jerome Powell to replace Janet Yellen when her term expires in February, Bloomberg reported based on comments from three people familiar with the matter. While a nomination of Powell would indicate that the Fed will remain in favour of normalising monetary policy only gradually, the same sources warned that Trump could change his mind at any time. John Taylor, who has a hawkish reputation, is another potential candidate and his appointment would provide the US dollar with further support.”

“While the markets are eagerly waiting for President Trump to reveal who won The Apprentice, the Fed is widely expected to leave interest rates unchanged on Wednesday. In his preview our Fed watcher Philip Marey argued that for now, we stick to our call for the next hike to be delayed to 2018, because we expect core inflation to continue to fall short. However, if incoming data are not weak enough to deter the Fed from its intention to hike in December, we will shift our call.”

“For the first time in a decade the Bank of England is anticipated to raise its policy rate on Thursday by 25bps to 0.50%. The market will be looking for any signals from Governor Carney whether more hikes will follow. Given the weakness in recent economic data, Rabobank’s BoE watcher Jane Foley anticipates that it will be a dovish hike, which means that potential for the pound to benefit from a policy move is likely to be limited.”

“Before the Fed and the BoE announce their decisions, the BoJ will hold its policy meeting on 30-31 October. Rabobank’s Björn Giesbergen expects no surprising outcomes, showing no changes to its interest rate or QQE with YCC policy. However, we do think that there is a real chance that the Bank will cut its inflation forecast for this year and next as the quarterly Outlook for Economic Activity and Prices is also on the agenda. In July, when the latest outlook was discussed, core inflation forecasts were already lowered from 1.4% to 1.1% for 2017 and from 1.7% to 1.5% for 2018. Although core inflation (ex. fresh food) edged up to 0.7% y-o-y in August/September, this was mainly driven by higher energy prices as core inflation (ex. fresh food and energy) touched only 0.2% y-o-y in August/September. As such, inflationary dynamics are simply weak, given that wages and prices have failed to accelerate so far, especially when taking into account recent positive labour market and output gap developments.”

“Core inflation was 0.4% on average between January-August, which makes it even likely that the BoJ decides to set its 2017 forecast below 1%. In their July outlook report, the BoJ already pointed that “a rise in medium- to long-term inflation expectations has been lagging behind somewhat, as such expectations are largely affected by the observed inflation rate”.Furthermore, despite a more hawkish stance by other major central banks such as the Fed and ECB recently, BoJ Governor Kuroda stressed that they will maintain their loose policy, irrespectively of what other central banks do. And the chances are higher that he is in the lead for this, given that Abe’s recent favorable election result makes it more likely that Kuroda will be reappointed when his current term ends in March 2018.”

“This hectic week will conclude with the US labour market report published on Friday. The non-farm payrolls are expected to increase sharply by 310k in October after the economy lost 33k jobs in September due to the negative impact of hurricanes.”

“While stocks ended last week on the firm footing, today’s sell-off in China dented upbeat market sentiment with European stocks mixed. The Shanghai Composite Index plunged the most in more than two months and bond yields surged on the back of escalation market concerns about deleveraging. With the Communist Party Congress now ended, volatility in Chinese assets may increase.”