This week’s key event was Wednesday’s Fed meeting. Whether the glass is half empty or half full depends on who you ask. In our view, the meeting was a slight disappointment, which investors seem to think too, at least based on yesterday’s market reaction. We believe the Federal Reserve missed a great opportunity to support the economy and risk sentiment by easing monetary policy, showing its determination to create inflation according to the new overshoot strategy. Overall, the message was that the Federal Reserve is not about to ease but will stick with the current monetary policy for a very long time. The Fed signals no rate hikes through to the end of 2023. See more in Fed Monitor – Glass half empty or half full?, 16 September. Several FOMC members are due to speak next week and, in our view, it will be interesting to hear what their different positions are, as we suspect there is great disagreement between them currently.
The Bank of England (BoE) kept monetary policy unchanged but discussed the effectiveness and implementation of negative interest rates in the UK. We look forward to hearing whether BoE Governor Andrew Bailey elaborates on this during his BBC webinar on Tuesday. There is still no sign that a Brexit deal between the EU and UK is imminent.
In Japan, the ruling Liberal Democratic Party elected Shinzo Abe’s right-hand man Yoshihide Suga as Abe’s successor with a large majority. He will continue with Abenomics and, in our view, is likely to form another stimulus package later this year. Suga may call a snap election to confirm his mandate within the coming month. He is a firm supporter of the Bank of Japan’s (BoJ) efforts to reach its inflation target. The BoJ kept monetary policy unchanged at its meeting this week and further stimulus does not seem to be forthcoming.
With respect to COVID-19, Europe is close to having more new cases than the US. However, the number of new deaths in Europe is still not rising, so nationwide lockdowns seem to us unlikely at this point due to the high economic costs associated with these. For more details, see COVID-19 Update – Europe close to having more new cases than the US, 17 September.
In Italy, regional elections are set to take place on 20-21 September. It is the first vote since the COVID-19 outbreak and will implicitly be seen as a test of the government’s handling of the crisis. In particular, we plan to follow closely the outcome in Tuscany, which has long been a stronghold of the centre-left governing Partito Democratico.
In our view, the most important data releases next week are the flash PMIs for Japan, the euro area (including Germany and France), the UK and the US. In our view, the PMIs are not the most accurate indicators in terms of GDP growth, so should be taken with a pinch of salt. In the Nordic region, we are looking forward to the Riksbank and Norges Bank meetings (Tuesday and Thursday, respectively).
We published our updated global macro outlook on Monday morning. We have grown more confident in our baseline scenario of a strong rebound in Q3 followed by a continued expansion in Q4 and into 2021 but at a more moderate pace. For details, see The Big Picture – Global recovery on track, 14 September.