The RBA minutes for the November minutes delivered a dovish tone as policymakers expressed concerns over the wage growth outlook. This is consistent with the central bank's worry over household spending as indicated in the meeting statement (released earlier this month). We believe this has added further pressure to Aussie's recent weakness, sending AUDUSD to the lowest level in 5 months. The central bank kept its powder, leaving the cash rate unchanged at 1.5%, in November. We expect the monetary policy would stay unchanged at least until 1H18 and could extend to 2H18.
The greenback slumped as the FOMC minutes for the November meeting revealed that 'several' members were concerned that weak inflation would be persistent, rather than temporary. They highlighted the worries about a 'a diminished responsiveness of inflation to resource utilization'. Another important message suggested in the minutes is that a December rate hike is almost a done deal with 'many' members judging that it is 'warranted in the near term' if the macroeconomic data remain steady. Such opinion has outweighed the thought of 'a few 'members' that a rate hike should be delayed. We view the USD selloff might have been over-reacted. Note that the (core) PCE, the Fed’s preferred inflation barometer, has improved, while the October CPI, released after the November meeting, also picked up. We believe the majority of the FOMC still retain the view that weak inflation is transitory.
Showing genuine concerns over the downside risks to inflation, BOC indicated it would be more 'cautious' over future rate hike decisions. In the concluding statement, policymakers stressed that 'while less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate'. The tone in this October appears more dovish than previous ones, likely resulting from recent developments of disappointing progress in NAFTA negotiations, household debt levels and appreciation of Canadian dollar. USDCAD jumped about +1% after the announcement.
ECB's July minutes voiced concerns over euro's strength. This is particularly important as the central bank is about to discuss tapering of the asset purchase program. Yet, the members generally agreed that "there was presently a continuing need for steady-handed and persistent monetary policy". The single currency instantly dropped to a 3-week low of 1.1661 against USD, 2-day low of 0.9061 against GBP and 4-day low of 1.1302 against CHF, before recovery.
In a surprising move, BOC increased the policy rate by +25 bps to 1% in September, following a rate hike in July. Policymakers cited the better-than-expected economic developments as a key reason for the removal of stimuli from the market. However, they remained cautious over a number of issues including excess capacity, subdued inflation, geopolitical risks and the strength in Canadian dollar.
We expect the BOE to vote 7-2 to leave the Bank rate unchanged at 0.25% and the asset purchase at 435B pound. Despite overshooting of inflation, most members would remain cautious and cite slow economic growth and Brexit uncertainty as reasons for keeping the monetary policy accommodative. However, the MPC is expected to adopt a more hawkish tone and strengthen the warning of a weak sterling. The new deputy governor Dave Ramsden would be voting for the first time. He is perceived as a dove amidst his warning of dire consequences after Brexit. He is expected to vote to maintain the status quo in the first 9-member MPC meeting since May.
RBNZ left the OCR unchanged at 1.75% in May. Policymakers shrugged off the recent NZD depreciation and the rise in inflation, indicating that the monetary policy would likely stay unchanged for the rest of the year and probably until 2020 before tightening. The market was disappointed by the lack of hawkish comments and the unchanged forward guidance. Down -1.85, NZDUSD slumped to an 11-month low of 0.6816 after the announcement.
BOE sent a hawkish message at the September meeting, noting that the majority of the members agreed that some withdrawal of stimulus should be appropriate in coming months. The key reason for the upcoming tightening is strong inflation which the central bank expects to rise above +3% in October. The market interpreted this as a signal that the historically low interest rate would be raised soon. Sterling rallied to a one-year high against the US dollar and a two-month high against the euro after the announcement. The market has now priced in over 54% chance of a rate hike in December. On the monetary policy this month, the BOE voted 7-2 to leave the Bank rate unchanged at 0.25% and unanimously to keep the asset purchase at 435B pound.
As widely anticipated, the November FOMC meeting contained few changes from the previous one. The members left the target range of the Fed funds rate unchanged at 1-1.25%. One surprise came from the upgrade of the growth assessment to 'solid' for the first time since 2015, despite disruptions by hurricanes. Inflation stayed below the +2% target and the members acknowledged that core inflation 'remained soft'. However, the encouraging growth outlook and further decline in the unemployment rate suggest that a December rate hike remains on track.
The Fed finally made formal announcement that it would begin normalizing the balance sheet in October. As indicated in June, the process does not involve active selling of securities, but a passive run-off of its holdings. The policy rate also stayed unchanged at 1-1.25%. The overall tone of the statement and the press conference came in more hawkish than expected. Depsite downward revision in the core CPI for this year, the staff upgraded the economic growth outlook and downgraded the unemployment rate forecast. The median dot plot continued to project one more rate hike this year, followed by three more increases in 2018. As CME's 30-day Fed funds futures suggested, bets for a December hike markedly jumped to 73.4% from 57.7% in the prior day.
The price actions in US dollar and Treasuries suggested that the market views the July FOMC minutes as a dovish one. The minutes revealed that policymakers were concerned that US inflation might stay below +2% longer than previously anticipated. On the other hand, it appears that an announcement on balance sheet policy is imminent. The market pricing of a rate hike in December ranges from 35-45%. It only expects less than two times of rate hike through end-2018, compared with four projected in the Fed’s dot plot. US dollar initially climbed higher upon release of the statement. Gains were, however, erased shortly with the DXY index ending the day -0.33% lower. Treasury prices strengthened, sending 2-year yields -3 points lower to 1.33% and 10-year yields -5 points to 2.23%.
The BOE left the Bank rate unchanged at 0.25%, the government bond purchases at 435B pound and corporate bond purchases at 10B pound. As we had anticipated, the members voted 6-2 to leave the interest rate unchanged with the newcomer Silvana Tenreyo supporting to maintain the status quo. Ian McCafferty and Michael Saunders continued to believe a +25 bps rate is needed. Sterling slumped after the announcement as the central bank downgraded the growth and wage forecasts. Governor Mark Carney warned that Brexit uncertainty is weighing on the country's economic outlook.
Headline CPI in the UK surprisingly stayed unchanged at +2.6% y/y in July, compared with consensus of a renewed pick up to +2.7%. From a month ago, inflation contracted -0.1%, after a flat reading in June. Re-designated by the Statistics Authority on July 31, the consumer price index including owner occupiers' housing (CPIH) steadied at +2.6%. The price of motor fuel continued to fall and contributed to the biggest downward change from June to July. Upward contributions came from a range of goods and services, including clothing, household goods, gas and electricity, and food and non-alcoholic beverages. Core CPI stayed unchanged at +2.4%, missing market expectation of a rise to +2.5%.
The RBA minutes for the September meeting contained little news. Four main areas of discussions include employment situation, Australian dollar, iron ore prices and the balance of household debt and low inflation. Policymakers acknowledged the improvement in the employment market, noting higher participation rate and steady unemployment rate. RBA appeared less worrisome about Aussie’s strength. By attributing the appreciation of the Australian dollar to USD’s weakness, it appears less likely that RBA would take actions to curb its strength. RBA expected iron ore prices to fall amidst new supply. As the biggest exporter of iron ores, Australian dollar has been affected by the movement in iron ore prices.
As widely anticipated, BOJ again voted 8-1 to leave the monetary policies unchanged in October. The targets for short- and long-term interest rates stay at -0.1% and around 0%, respectively while the guideline for JGB purchases remains at an annual pace of about 80 trillion yen. The central bank has turned more upbeat on the economic outlook, especially on Capex and consumption. Goushi Kataoka was again the lone dissent as he supported bond purchases so as to facilitate the decline of 10-year (or over) bond yields. Governor Kuroda's speech at the press conference has not tilted towards less easing/ policy normalization in the near-term
FOMC is highly likely to raise its policy rate, by +25 bps, to a range to 0.75-1% in March. With a March rate hike a done-deal, the market focus turns to the future monetary policy stance. We expect two more hikes, one in June and one in September, this year. Given the recent improvements in employment and inflation, the market has begun talking about four rate hikes in 2018. For now, we stick to three, as suggested in December's dot plot. The market is currently pricing in three 25-bps hikes this year and two for 2018. The Fed's updated Summary of Projections (SEP) would be released with fan charts added for the first time.
The RBA minutes for the December meeting revealed that policymakers were more upbeat on the global and domestic economic outlook. While maintaining a natural monetary policy stance, the minutes contained some hawkish ingredients, suggesting that recent data on employment and inflation have made the members more confident. The key concerns remained subdued wage growth and household consumption.
RBA left the cash rate unchanged at 1.5% in June. While the decision had been widely anticipated, Aussie slumped after the announcement as the central bank failed to deliver a more hawkish tone as its US and European counterparts did. Policymakers affirmed that Australian economy would continue to grow gradually. Yet, they pointed to the strength in Australian dollar and subdue inflation as key reasons for standing on the sideline. Meanwhile, RBA remained concerned over the overheating housing market.
As expected, BOJ left its monetary stance unchanged in July. The central bank voted 7-2 to keep its target for 10-year JGBs at around 0% and its short-term deposit rate at -0.1% as expected. It also maintained the measure to buy government bonds at an annual rate of 80 trillion yen. What is more dovish is that the central bank now forecasts it would take longer than previously anticipated for the economy to achieve the +2% inflation target. It is the 6th time that the central bank pushed back the projected timing for achieving the inflation target. USDJPY has rebounded +0.23% since the announcement.
As widely anticipated, RBA left its cash rate, for an 8th meeting, at 1.5% in April. While headline CPI has more or less reached the central bank's target level, the core reading has remained subdued. Policymakers have decided to take more time to gauge the inflation outlook before action. Meanwhile, the unemployment rate has remained elevated while excess capacity in the job market has rendered wage growth weak. The RBA reiterated its rhetoric on the housing market, suggesting conditions 'continue to vary considerably around the country'. Policymakers would be cautious over adopting another rate cut as previous reductions have caused a surge in housing produces and rebound in investment related credit growth. A rate hike is equally unlikely as Australian dollar has remained at historically high levels.