Duncan Donald

Fri, Sep 18

A big week for global Central Banks – Inaction causes reaction

In a week where all eyes rested on the Central Banks of the UK, Japan and the US, there was not any real expectation of changes in the levels of interest rates or even the levels of bond buying stimulus. Where the markets were focussed, was on the forward guidance delivered in the post announcement statements.  Following on from a slightly more positive outlook from Christine Lagarde the Head of the European Central Bank last week, the markets seemed to table more optimism for the projections.


First up was Jerome Powell of the US Federal Reserve who elected to keep rates at 0.25%. In his press conference he didn’t exactly exhume confidence either in body language nor outlook. With the tone set firmly that they will focus on the long-term healing of the economy, mindfully watching employment and inflation carefully. The reluctance to commit, or even hint that improving data brought the staggering stock markets lower into the end of the week, and brought him much criticism across news agencies. However, whilst yes it wasn’t a brave or assured statement, the US has a great deal of headwind, with the November election drawing closer, so naturally Powell will want to see what transpires before showing their hand on rate path expectations, then suffer the embarrassment of having to adjust should we see a significant surprise.


With the US Dollar ending the week on a softer tone, one of the most significant shifts seen in the market last week was the appreciation of the Chinese Yuan and Japanese Yen. With China leaping ahead in the economic bounce back from the pandemic, there is a great deal of optimism for the currency bringing a week on week gain of 1% against the softening US Dollar. The recovery since the pandemic, increased domestic holiday’s and strong data as the US head into a prolonged period of low rates, means there will certainly be more interest in Chinese Treasury yields moving forward.  The gain seen this week in the currencies of both China and Japan, after long periods of indirection could well turn out to be the start of a trend into the year end.


In the UK, it's been another tough week with the currency volatile in a tight range. The two main moves of the week came on Thursday. The first unsurprisingly came around the Bank of England interest rate announcement. BoE Head Andrew Bailey’s committee did elect to keep rates unchanged at 0.1%. But, it was what seemed like furthering of the banks exploration of the usage and effectiveness of negative interest rates, that brought a sharp move lower to the Pound. With the language around the potential drifting from the fact they could, but don’t want to, towards the fact that with rising Covid rates and a potentially messy Brexit divorce, negative rates could be inevitable. The second move on Thursday came as European Commission President Von Der Leyen commented positively on the hope of reaching a deal, erasing the sterling losses seen post BoE. 


For now, the fate of Brexit remains up in the air. Boris Johnson got his law breaking bill through Parliament, thanks to the large majority he holds and the support of the DUP.  However, with fears of a party revolt and heavy criticism from the EU and Pelosi and now Biden in the States, there has been evident backtracking this week.  So in essence, like the US  Federal Reserve for now the Bank of England has to stand back and wait to see the eventuality of this major event in the next month but have now signalled they have a disaster recovery explored and ready to go.  I will reiterate that should a deal be reached, the upside potential is growing for the Pound, but it remains that this is the case as its becoming the least likely outcome. 


The Week Ahead


Monday - A quiet day with Japan on public holiday. Little in the way of meaningful data but the Fed’s Brainard and Williams speak in the afternoon as well as Head, Jerome Powell in one of his many speeches this week. 


Tuesday - First up is UK Public Sector Net Borrowing before BoE Head Bailey speaks. Mid morning comes the UK CBI Industrial Orders and Eurozone Consumer Confidence. In the afternoon we hear from the Fed’s Powell. 


Wednesday - It's a day of PMI data with Australia, France, Germany, UK, Eurozone and the US all reporting numbers. In the afternoon we again hear from the Fed’s Powell as he testifies, and later in the session we hear from the Fed’s Quarles. 


Thursday -  The Swiss National Bank’s rate decision comes first before German IFO data and UK CBI numbers. In the afternoon we hear from the heads of the Fed and BoE, as well as US Treasury Secretary Mnuchin and the Fed’s Williams.


Friday - In the morning session we get European Money Supply data. In the US we get Durable Goods data and the Fed’s Williams speaks.