Hurricanes, noisy data and plodding inflation to keep Fed from raising rates

Last week the pound was the currency to watch and, with the Bank of England rate decision and relatively little on the docket for the US, that’s understandable. But, it’s all change this week, with the Federal Reserve rate decision due on Wednesday. The rate-setting committee is widely expected to hold the Federal Funds Rate unchanged. With inflation – on both the consumer and the producer side – plodding along and weather events over the past month or so leaving a long tail of both blockers and incentives to economic activity, there’s too much noise at present for the Fed to look through and hike rates confidently.

What will be watched for is any further commentary on the winding down of their balance sheet, any perceived political risks to their inflation/economic forecasts and any hints on whether we’ll see a December rate hike.

Outside of the Fed rate decision, press conference and economic forecasts on Wednesday, Fed’s Kaplan (a voter on the FOMC) speaks on Friday.

No tier one data will keep focus on sterling and the euro

There’s very little (if any) tier one data on the slate this week, with the highlights being housing construction numbers on Tuesday, housing sales figures on Wednesday and PMI figures finishing off the week on Friday. As such, barring the Fed decision and press conference on Wednesday, focus will be on markets elsewhere. In the UK, focus has shifted from international politics and Brexit to the Bank of England and whether they’ll raise interest rates in November.

We now have to think that they will raise rates, but only by 25bps to bring the rate back to 0.5%. The language from the Monetary Policy Committee and Member Vlieghe’s speech on Friday was a fairly transparent move to realign the expectations of markets, business and consumers that rates are not going to stay at 0.25% for months and months. Noting that there is ‘scope for a stimulus reduction in the coming months’ and ‘that a rate hike may be needed within months’ can only move expectations in one direction and, as such, we think rates will rise in November and that the vote will likely be unanimous.

CPI numbers won’t deter Bank of Canada from tightening further

With the Bank of Canada surprising markets in early September by raising interest rates, you’d expect the Bank to be facing inflationary pressures at home, but that doesn’t appear to be the case. Beyond house prices (particularly in the cities of Vancouver and Toronto), those looking for sharp rises in prices will be left wanting. July’s rate of just 1.2% year-on-year is well below inflation rates seen in parallel economies and they’re certainly not considering tightening policy – so why in Canada? The BoC justified their decision by stating levels of GDP were ahead of expectations, consumer spending is on track and export growth is accelerating – but markets will have to see this feed through into inflation before it believes the Bank of Canada can go any further with interest rates.

Have a great week