Central Banks Strike Increasingly Hawkish Stance

Inflation and Unemployment Data Spur BoE Talk of Tightening Monetary Policy

The Bank of England telegraphed its own normalization plans just sessions after the Bank of Canada took markets by surprise with a move to raise its own benchmark for the second time in two meetings. Rising inflation and multi-decade low unemployment stoked the BoE’s decision to contemplate reducing or removing accommodative measures over the coming months.

Last Week

Even though Brexit has weighed heavily on the outlook as evidenced by the latest indications that EU negotiations remain hung on several issues, the broader economy continues to progress. Inflation figures pointed to a renewed surge in inflation after consumer prices rose 2.90% on an annualized basis while core prices climbed 2.70%. In addition to the headline inflation optimism, the unemployment rate fell to a new multi-decade low of 4.30%, though sluggish wage growth weighed on sentiment. Regardless, the Bank of England signaled its intention to begin gradually removing accommodation over the near-term, helping the Pound push to a new 1-year high against the US dollar.

Shifting gears, US inflation also experienced a pickup, with core inflation printing at a 1.70% annualized pace of increase through the end of August as the headline figure came in at 1.90%. Apart from economic data, US crude inventories rose for second straight week amid record US gasoline stockpile draw-downs as shuttered refining capacity gradually comes back online after the impact of Hurricane Harvey. To round out the week, efforts by policymakers to cool housing speculation and rampant debt growth are starting to take shape and leave a lasting impact. Growth in Chinese industrial production slipped to 6.00% from 6.40% while fixed-asset investment faltered to its lowest expansionary pace since 1999.

The Week Ahead

Major decisions loom in the approaching sessions, with central bank officials from the United States Federal Reserve and Bank of Japan set to meet this week. No major changes are anticipated from the Fed, with interest rates forecast to remain on hold at 1.25%. However, the dollar could see a shift if the Central Bank discusses the prospect for balance sheet reduction during its post-decision statement. Apart from policy, housing will be the major focus in the US, with building permits predicted to fall as housing starts and existing home sales rise modestly.

Shifting across the Pacific, the Bank of Japan is set to announce its own monetary policy decision, with no major surprises anticipated. On the trade front, export figures are expected to continue advancing whereas the pace of imports is projected to decelerate on an annualized basis. In the Euro Area, August inflation data is forthcoming, with headline CPI forecast to rise to 1.50% from the 1.30% recorded in July whereas core inflation is expected to remain unchanged at 1.20%. To cap off the week, UK Prime Minister Theresa May will be speaking in Florence, where she will discuss Brexit. This will be especially important considering the current headwinds facing negotiations as neither party agrees on the basic tenets for a smooth exit.