Market movers today
This morning we have updated our Fed view and now expect the Fed to cut by 25bp at each of the next five meetings taking the target range to 0.75-1.00% at the March meeting . We do not anticipate the Fed will pre-commit to more easing but that it will stick to its current ad hoc approach. If the Fed really wants to reflate the economy and markets, it may need to commit more to easing and/or cut more and faster eventually. For more details including the impact on FX and Fixed Income please see the full analysis here: FOMC research – New Fed call: Five more from Fed , 16 August.
We have a very light data calendar today in terms of economic data releases. Hence focus will be on central bank signals and political signals (not least after ECB’s Oli Rehn’s comments yesterday, see below).
In the US , University of Michigan’s survey of consumer confidence will be in focus in particular after yesterday’s strong retail sales number. The US consumer is one of the key forces holding up US growth amid weak investment growth.
Selected market news
Yesterday, ECB GC member Olli Rehn was interviewed to the WSJ (paywall) that the ECB was preparing a ‘very strong package ‘. He further said that ‘it’s often better to overshoot than undershoot ‘. Rehn is among the most dovish ECB members, and his recent proposals called for a revisit of the inflation mandate back in March this year. We find the interview very interesting, however, at current the juncture, we do see a risk of ECB not being able to over-deliver compared to the very dovish market pricing/ expectations . Markets are currently pricing 18bp cut for the September meeting (2bp lower than prior to the story). We expect ECB to announce a 20bp depo rate cut, alongside 12months of 45-60bn/month QE, tiering system and extension of forward guidance at the 12 September ECB meeting , see ECB Research – New ECB call: rate cut and restart of QE , 18 June.
US data yesterday were strong, not least US retail sales (control group) which rose 1.0% in July suggesting private consumption remains a strong growth driver in Q3. We also believe the fundamentals for continued private consumption growth are strong with e.g. high consumer confidence and solid real wage growth. Both the Philly Fed and Empire PMI manufacturing indices signal a rebound in ISM manufacturing in August. It may seem odd that the Fed is easing while economic data is strong but the Fed will be concerned whether data will continue to stay strong without further easing (see bullet 1 above).
Yesterday, Norges Bank kept rates unchanged as expected and repeated the tightening bias from June. That said, global turmoil has increased uncertainty about rates going forward. We keep our call for a slightly above 50% probability of a September hike. In our view, NOK will continue to trade on global risk sentiment. For more details please see Norges Bank Review: Keeping the tightening bias, but increasing downside risk , 15 August.
