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Week Ahead: Central banks galore but fiscal response is the key
It’s a veritable cornucopia of central bank delights this week with the Federal Reserve, Bank of England and Bank of Japan all in action, following the ECB and Bank of Canada last week. The Bank of Japan decision may well be overshadowed by Japanese politics as the ruling Liberal Democratic Party (LDP) elects a new leader days before the national diet elects a new prime minister.
Meanwhile we continue to keep our eyes on the high frequency economic data, with jobless claims and retail sales numbers on tap as well.
The Federal Reserve convenes on September 15th and 16th for the first time since Jerome Powell signalled that the central bank would be prepared to tolerate higher inflation as a trade-off for a swifter economic recovery and jobs growth. Unemployment has fallen since the pandemic peak but is not improving quickly enough.
The Fed is not expected to announce any fresh policy change but will reinforce Powell’s message from Jackson Hole on the policy shift. Indeed the main focus for the Fed right now is actually not monetary policy but fiscal as members await any move in Washington to deliver a fresh stimulus package.
Bank of England
The Bank of England also meets this week, amid mounting speculation that the Old Lady of Threadneedle St will turn to negative interest rates to stimulate the economy.
Speaking to MPs recently, governor Andrew Bailey refused to rule out negative rates – a policy that has systematically failed to deliver the required inflation in the Eurozone. “It’s in the box of tools,” he said. “We’re not planning it at the moment, we’ve got no plans to use it imminently, but it is in the box.”
Meanwhile, again it is the fiscal response that seems to matter more right now – central banks have already shot most of their ammunition. Andy Haldane, the BoE’s chief economist, warned last week that the UK’s furlough scheme should not be extended – but will the chancellor cave to demands to prolong it in order to protect jobs? As the furlough scheme approaches its end in October, the government may be forced to extend in order to avoid a cliff-edge in job losses.
Japanese yen in focus
There is a fair chance Japanese equity markets and the yen will see heightened volatility this week with two big risk events. On Monday, the ruling Liberal Democratic Party (LDP) elects a new leader days before the national diet elects a new prime minister.
Following the resignation of Shinzo Abe on health grounds, chief cabinet secretary Yoshihide Suga is the favourite to replace him. Whilst he is the continuity candidate and has pledged to carry on with Abenomics, there is a risk that he may call an election, which could introduce political risk to the JPY and Nikkei 225. The Bank of Japan statement the day after the Diet vote is not anticipated to rock the boat.
On the FTSE, keep an eye out for Ocado Q3 earnings on Tuesday, with investors keen to get a read on how the Marks & Spencer partnership has started. Investors will also want to know the perennial question – where is the cash? Ocado’s share price has rocketed this year on the boom in online retail. Its +80% rally in 2020 puts it behind only Fresnillo in terms of YTD gains.
However, it’s yet to really deliver any returns to investors by way of free profit.
Meanwhile retail bellwether Next (-16% YTD) is a cash cow that even with a collapse in the high street consistently manages to deliver free cash flow. Its half year results follow on Thursday. In July the company reported that while full price sales in the second quarter were down -28% against last year, this was far better than expected and an improvement on the best-case scenario given in the April trading statement. Management guided full year profit before tax at £195m.
Highlights on XRay this Week
Read the full schedule of financial market analysis and training.
|17.00 UTC||14-Sep||Blonde Markets|
|From 15.30 UTC||15-Sep||Weekly Gold, Silver, and Oil Forecasts|
|13.00 UTC||16-Sep||Indices Insights|
|14.45 UTC||17-Sep||Master the Markets|
|17.00 UTC||17-Sep||Election2020 Weekly|
Key Events this Week
Watch out for the biggest events on the economic calendar this week. A full economic and corporate events calendar is available in the platform.
|09.00 UTC||14-Sep||Eurozone Industrial Production|
|01.30 UTC||15-Sep||RBA Monetary Policy Meeting Minutes|
|02.00 UTC||15-Sep||China Industrial Production & Retail Sales|
|06.00 UTC||15-Sep||UK Unemployment Rate, Claimant Count Change|
|09.00 UTC||15-Sep||Germany, Eurozone ZEW Economic Sentiment|
|After-Market||15-Sep||Adobe – Q3 2020|
|06.00 UTC||16-Sep||UK Consumer Price Index|
|12.30 UTC||16-Sep||US Retail Sales|
|14.30 UTC||16-Sep||US EIA Crude Oil Inventories|
|18.00 UTC||16-Sep||FOMC Interest Rate Decision, Economic Projections|
|18.30 UTC||16-Sep||FOMC Press Conference|
|22.45 UTC||16-Sep||New Zealand Quarterly GDP|
|01.30 UTC||17-Sep||Australia Employment Change, Jobless Rate|
|04.00 UTC||17-Sep||Bank of Japan Rate Decision & Statement|
|11.00 UTC||17-Sep||Bank of England Interest Rate Decision|
|12.30 UTC||17-Sep||US Weekly Jobless Claims|
|14.30 UTC||17-Sep||US EIA Natural Gas Storage|
|23.30 UTC||17-Sep||Japan Inflation Rate|
|06.00 UTC||18-Sep||UK Retail Sales|
|12.30 UTC||18-Sep||Canada Retail Sales|
|14.00 UTC||18-Sep||US Preliminary University of Michigan Sentiment Index|
Little help for rangebound yen likely from Bank of Japan commentary
The Bank of Japan releases its Summary of Opinions and monetary policy meeting minutes this week. Policy normalisation is moving at a glacial pace, so the safe-haven yen is unlikely to find support on the latest comments from policymakers.
Central banks around the world are tilting towards the dovish end of the spectrum. This is epitomised by the futures market’s pricing in of a rate cut from the Federal Reserve this year. However, when it comes to caution, the Bank of Japan is the archetype – it was the first to implement quantitative easing and continues to pump trillions into the economy while tinkering with the yield curve and keeping rates negative.
The plan is unlikely to change any time soon, especially now that global conditions appear to be weakening. There is little certainty on a macro level to suggest the BOJ’s work is anywhere near done, even if the fears of a worldwide recession that tanked markets at the end of 2018/beginning of 2019 were overdone.
This leaves the yen facing more of the same; a narrow trading range against its major peers.
USD/JPY edges higher as fears over US growth fears ease
The US dollar has been slowly pressuring the yen lower over the course of the past few months. Strong US data has helped ease fears over the need for the Federal Reserve to pivot too severely into dovish territory.
EUR/JPY rangebound as ECB and BOJ battle for dovish crown
The EUR/JPY pairing was almost slap-bang in the middle of its multi-week trading range at the time of writing. While the European Central Bank could bring quantitative easing back into play later in the year, which would be yen-supportive, the long-term outlook remains that it will be the weakening of overseas policy outlooks that push JPY higher in the near-term, not the machinations of its own BOJ.
Yen unable to take advantage as Brexit uncertainty keeps pound floored
GBP/JPY is just a pinch overbought on the Relative Strength Index. The chart above shows how the pairing has settled into a narrow channel over the past few weeks. Brexit uncertainty is keeping sterling on pause, however the yen is unable to capitalise on this due to the lack of optimism surrounding Japanese monetary policy.