Markets Tense Ahead of Major Central Bank Decisions

Weekly Report - 18/09/2016

Policy Puts Markets on Edge

Financial markets were under pressure the last week despite some positive data from major world economies as market participants gear up for the BoJ and FOMC interest rate decisions which will be reported on Wednesday.  The addition of the oil industry conference in Algeria this week should add some fireworks to crude oil volatility as an output freeze is debated.

Last Week

The big news of the prior week as the interest rate decision delivered by the Bank of England.  Although the Monetary Policy Committee opted not to adjust the benchmark interest rate which currently sits at 0.25% or expand quantitative easing, they have hinted they could cut rates further in response to softening economic activity.  Although inflation remains intact and manufacturing has picked up while unemployment remains on hold at 4.90%, it still remains to be seen whether or not it will be enough accommodation for the UK to avoid a recession.  Outside of the UK, inflation figures reported last week across Europe showed a mixed picture, but was somewhat positive.  On an aggregate basis for the Euro Area, annualized headline inflation rose by 0.20%, matching estimates and the prior figure.  The main drag was Spain which remained in deflationary territory year over year at -0.10%, with new elections forecast to be held in the coming months after the last elections failed to produce a new coalition government.  Euro Area industrial production was notably weaker, falling -0.50% year over year after sliding -1.10% month over month.  The week ended with inflation data from the United States coming in hotter than anticipated, with headline CPI printing at 1.10% versus 0.80% prior and core headline CPI at 2.30% on an annualized basis, raising the possibility of action on rates from the FOMC in the coming week.


The Week Ahead

Central banking will dominate the week ahead with major policy announcements from both the Bank of Japan and US Federal Open Markets Committee.  The Bank of Japan will kick off the decision on Wednesday morning, with some analysts anticipating lower interest rates or a potential operation “twist” that will see the bank of Japan try and sell longer-dated debt in exchange for buying shorter-dated debt. Additionally, the long-anticipated release of the “Comprehensive Review” is expected to give some insight into policies ahead and if the Bank of Japan will pursue more aggressive accommodation.  After the BoJ, the US Federal Reserve voting members are expected to announce their very own decision on policy not much later.  Although the probability of a rate hike has fallen significantly, Friday’s inflation data has boosted the possibility somewhat.  Expectations are for rates to rise at least once before the end of 2016, with some Fed members keeping the door open for two rate hikes before year end.  To cap off a session with significant events, the Reserve Bank of New Zealand will also be meeting to determine monetary policy, with interest rates forecast to remain on hold at 2.00%.  Lastly, it will be worthwhile to keep an eye on the oil industry conference in Algeria, the sidelines of which will be hosting new output “freeze” talks among key energy industry players, potentially contributing to higher volatility in oil prices.


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