The Fed: Gradual Policy Tightening In Full Swing
The Fed has reaffirmed its commitment to sticking to its plan of “gradual” policy normalisation with two more hikes forecast this year. The economic outlook is good, with the economy on track to grow by around 4% in Q2 2018, boosted by tax cuts with inflation continuing to creep higher. Employment growth is currently averaging around 207,000 per month so far in 2018, up from the 182,000 average over 2017.
The only real risk to the status quo at this stage is the trade situation as the US prepares to implement tariffs on Chinese goods this coming Friday, with China responding in kind. However, for now it seems that the investment community is not too concerned with this as the economic impact is expected to be limited. Indeed, business surveys continued to highlight confidence and unless tensions escalate dramatically and growth is knocked, the Fed should remain on course of a further two hikes this year keeping USD supported.
The ECB: Dovish Tapering In Effect
At its last meeting the ECB apparently tried to appease both camps by essentially announcing a dovish tapering whereby the bank will wind down its quantitative easing program by year end while at the same time keeping rates at their current low levels until at least summer 2019. While the ECB acknowledged that there had been a soft patch over Q1, the economic outlook remains buoyant and the ECB is expected to deliver on its promise of winding down QE by year end.
The risk to this outlook is the uncertainty around the trade dispute between the EU and the US as well as political turmoil in the eurozone, specifically in Italy, Germany and regarding Brexit. Any further deterioration in these elements increases the risk of QE being kept open into 2019.
The BOE: August Rate Hike Looks Likely According To Commentary
After passing on the opportunity to raise rates in May, following the data weakness seen in Q1, the market is now trying to gauge whether the UK economy has rebounded strongly enough over Q2 to justify a BOE rate hike in August. At the June meeting, Andy Haldane, the bank’s chief economist, joined two other policy makers in voting for a rate hike, suggesting that the tide is turning in favour of a summer hike.
Recent data supports this view with retail and service sector data having rebounded despite the fact that consumers are still showing reluctance around big ticket purchases. Recent BOE commentary seems to support the view that the bank will raise rates in August unless we see any significant data weakness in the interim. However, the likelihood of further hikes over the remainder of the year appears low given the increased focus on Brexit into Q3 2018.
Bank of Japan: Quietly Trying To Taper
The main shift in the BOJ’s modus operandi over this year has been with regard to their bond purchases with the bank now occasionally passing up on regular bond purchases which can be seen as the bank trying to avoid prematurely exhausting its available instruments, especially while bond yields are temperate.
In a sense, the bank is conducting an unofficial taper though it is having difficulty doing so given the focus on the ECB’s long, drawn out taper. Furthermore, with the global trade landscape deteriorating and domestic data flow losing steam it seems that the BOJ will likely have to put any bigger plans on the back burner until 2019.
Bank of Canada: July Rate Hike Depends on Employment Data
In line with recent commentary, the market had been highly expectant of a July BOC rate hike. However, the latest comments from BOC governor Poloz have cast doubt on this. Referring to the upcoming meeting Poloz said that “a litany of things we simply do not know” as well as uncertainty linked to trade disputes, would “figure prominently in our upcoming deliberations”.
The day after these comments were made however, Poloz adopted a more constructive tone highlighting “we’re in a situation where the economy will warrant higher interest rates” adding “we’re data dependant, not headline dependant”. We’re not going to make a policy on the basis of political rhetoric”. These statement suggest that Poloz was perhaps concerned that the market was reading too much into his earlier comments. With this in mind it seems that provided Friday’s labour market data comes in solid, a July rate hike is still on the cards.
The RBA: Weak Wage Growth To Keep Bank on Hold Until 2019
Alongside keeping rates on hold at its July meeting, the bank appeared to take a more negative shift in its economic outlook, highlighting a plethora of concerns such as weakness in emerging markets, global trade worries, stronger US Dollar, weakness in domestic housing market and forecast is for weakening terms of trade. Despite the fact that inflation is picking up, the bank has reiterated that low wage growth and weak household income are the main obstacles to a rate rise which mean that the bank looks highly likely to sty on hold until next year.