Fundamental Recap: Central Bank Parade Marches On
Last week saw heightened market volatility surrounding monetary policy decisions from major central banks, along with a deluge of company results in the thick of earnings season. The US Federal Reserve and Bank of Japan both moved markets last week with their policy statements, and more loom ahead with the Reserve Bank of Australia and Bank of England providing their own rate decisions and statements this week.
The Fed opted once again to refrain from raising interest rates, as expected, after its two-day meeting concluded on Wednesday. Although the central bank acknowledged economic improvements, most notably with respect to the employment situation, concerns over lagging inflation weighed on the Fed’s decision. Overall, while the door was kept open for a September or December move, any rate hike will be dependent, as usual, on economic data going forward. This has once again prolonged market uncertainty and led to some volatile fluctuations in financial markets. Since Wednesday’s Fed statement stocks and gold have continued to surge while the US dollar has plunged, as might have been expected given that the Fed remains on persistent hold and lacks guidance on rate hikes going forward.
Following the Fed last week was the Bank of Japan’s (BoJ) release of its monetary policy statement on Friday morning. Because Japanese Prime Minister Shinzo Abe earlier revealed an unexpectedly sizable 28 trillion yen government stimulus package, pressure was placed on the BoJ to follow suit by aggressively expanding its stimulus program in kind. As it turned out, the central bank opted not to cooperate fully with Abe. While ETF purchases were increased and dollar-lending was expanded, no changes were made to already-negative interest rates or its bond-purchase program. This disappointed both the increasingly dovish Japanese government as well as investors who were hoping for more aggressive action from the central bank. The most direct result of this was a sharp boost for the Japanese yen, which helped prompt USD/JPY to fall well below the 103.00 handle to begin targeting the key 100.00 psychological level once again.
Turning towards this week, other important central bank statements will be released, starting with the Reserve Bank of Australia (RBA) on Tuesday. There has been much speculation over the RBA’s monetary policy stance, particularly with regard to recent inflation data. The Consumer Price Index (CPI), a major inflation indicator, showed in April a highly disappointing reading for the first quarter at -0.2% versus +0.3% expected. That helped compel the Reserve Bank of Australia to cut the cash rate in May to its current 1.75%, a record low. The RBA also recently released minutes of its July policy meeting, after which speculation increased that the central bank could move to cut interest rates even further in August, prompting a sharp drop for the Australian dollar. This past week, second quarter CPI data was released, showing a much more palatable +0.4%, in-line with prior expectations. Despite this higher inflation reading, consensus expectations still forecast a likely RBA interest rate cut to a new record low of 1.50%.
Also this week will be the highly-anticipated monetary policy decision and summary from the Bank of England (BoE) on Thursday. This will be the second BoE policy event since the historic Brexit outcome in late June. The first such policy event took place in mid-July, when the central bank unexpectedly opted for complete inaction, refraining from cutting interest rates and declining to implement other stimulus measures. Essentially, the BoE was signaling a "wait-and-see " approach to the continually unfolding saga of post-Brexit consequences. This led to a temporary short-squeeze and relief rally for the embattled British pound. While inaction ruled the day, however, the central bank did state that “most members of the committee expect monetary policy to be loosened in August.” Though this was far from a promise, the statement served to indicate that the BoE did indeed have intentions to ease policy at its next available opportunity. That opportunity will come this week, and the consensus is indeed forecasting a rate cut of 25 basis points from its current 0.50% down to 0.25%, which would be a new record low.
Aside from the RBA and BoE, this week also brings the non-farm payrolls employment report out of the US on Friday. Currently, the consensus forecast is pointing to around 180,000 jobs added to the US economy in July. As usual, any outcome that deviates substantially from the forecast could have a significant impact on the possibility of a Fed rate hike in September, as well as on markets ranging from gold to the US dollar to the high-flying equity markets.
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