Another Week Of Central Bank Driven Markets Ahead – Fed Predictable, BOJ To Keep Markets On Tenterhooks

U.S stocks retreated on Friday in the face of stronger dollar and the slump in the banking and energy sectors, trimming weekly gains. The S&P500 Index fell 0.38 percent to 2,139.16, the Dow Jones Industrial Average lost 0.49% to close at 18,123.80 and the Nasdaq Composite inched down 0.1% to 5,244.57.

The U.S dollar surged across the board in the past week, on the back of stronger-than-expected inflation data for August. The Labor Department reported on Friday that consumer prices increased by 0.2 percent last month after being unchanged in July. In the 12 months through August, consumer prices increased 1.1 percent, extending the rally after advancing 0.8 percent in July, pointing to a steady build-up of inflation that is heading towards to central bank’s target of 2%. The core CPI, which strips out food and energy costs, also witnessed a jump of 0.3 percent last month, increasing by 2.3% compared to the same period last year.

This could help provide the Federal Reserve with confidence to consider a rate hike by the end of this year, after a raft of disappointing economic reports released recently, that wiped out chances of a move on rates next week.

Most of data released on Thursday failed to generate positive signals, reinforcing the dovish comments from FOMC voting member Lael Brainard that the central bank should be patient, and wait for more evidence of stronger consumer spending and inflation.

U.S. wholesale prices were reported to be flat in August, mostly because of sharp declines in the cost of food and gasoline. This consequently dampened retail prices for the same goods and dragged the overall retail price index down by 0.3%. Additionally, sales at U.S. retailers fell for the first time in five months. Core retail sales, which exclude automobiles, ticked lower by 0.1% in August after falling by 0.4% one month earlier.

In a separate report on Thursday, the Federal Reserve announced that output at American manufacturers fell 0.4% in August. The consensus forecast had called for a decline of 0.2%. The results are consistent with the ISM’s factory survey for August, which had signaled a contraction, and also worsened the outlook for producers, after a private survey of purchasing managers last week showed that manufacturing activity contracted in August.

Sterling was hit the hardest last week, after European Council President Donald Tusk said on Friday that UK Prime Minister Theresa May was likely to trigger the formal process of leaving the European Union as soon as January or February next year.

Subsequent to recent data indicating that the U.K economy is performing stronger than expected and a rate cut at the August meeting, the BOE left its key interest rate unchanged at the September meeting. The BOE left rates at a record low 0.25% and made no further changes to the size of its QE program on Thursday. However, the Monetary Policy Committee noted that near-term data could not be used to draw inferences for longer-term forecasts. Thus, there is a chance for a further cut in interest rates in 2016, should the economy weaken.

The Swiss National Bank also kept rates unchanged at its monetary policy meeting last week. The SNB also committed to interventions in the foreign exchange market if necessary to reduce the attractiveness of the Swiss franc and contain the appreciation pressure on the currency.

Next week will be another week where central banks shall remain the center of attraction. The name that draws market attention the most is the U.S Federal Reserve. Investors do not expect any move on interest rates by the Fed at September FOMC’s meeting.  However, Fed Chair Janet Yellen will hold a press conference after the rate decision and the central bank is due to release its latest economic projections. Therefore, markets will be waiting for hints to assess the possibility of a tightening in December.

The Bank of Japan will hold its monetary policy meeting on the same day was the Fed. Unlike its American counterpart, the BOJ seems to be confused about what it will do next week. According to a report in the Sankei newspaper on September 7th, BOJ policymakers are currently divided into three groups. One supports negative interest rates to be deepened by another 10-30 basis points, another advocates expanding government bond purchases by ¥10-20 trillion per year, while the third group opposes further stimulus.

The division comes from the fact that regardless of the Japanese government’s persistent stimulus programs, the economy has shown very few signs of recovery or any hints of not falling back into deflation.

The monetary policy announcement which may draw the least focus is from the Reserve Bank of New Zealand. Unlike the two central banks above, the RBNZ has just lowered its rates in August. Thus, no rate cut is foreseen this Thursday, especially since New Zealand is witnessing price growth, and its GDP growth is also accelerating.

Having been depressed recently by disappointing employment numbers, the Australian dollar is expected to have a quiet week next week as the only data scheduled to come out of Australia are minutes from the last Reserve Bank of Australia meeting, and the Mid-Year Economic and Fiscal Outlook.

There will be no major Canadian economic reports released next week until Friday, which means the CAD will take its cue from oil for most of the week. The Loonie has been falling sharply against most of its peers, being driven entirely by slumping oil prices. Crude dropped more than 5% on the week, with Brent falling below $46 per barrel and U.S light, sweet crude tumbling to $43.17 per barrel at the market close last Friday.

For the week ahead, oil traders will be focusing on U.S. oil supplies data on Tuesday by the American Petroleum Institute, data on stockpiles by the U.S. Energy Information Administration on Wednesday, and U.S. oil rig count by Baker Hughes on Friday for fresh supply-and-demand balance signals.

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