Central banks delivered further hikes largely as expected, as inflation pressures remain high despite the rising recession risks. In the US, Fed hiked rates by 75bp as broadly expected, but the updated ‘dot plot’ signalled more hawkish rate expectations than markets had expected. While Powell provided few new signals on the upcoming tightening pace, he repeated that Fed is increasingly focusing on limiting economic growth below potential and looking for signs of cooling labour markets. In contrast, we are forecasting a rebound in the Q3 GDP figures, and thus we are also calling for two more 75bp hikes in the November and December meetings. Read our full Fed review: Hawkish 75bp – Fast hikes to continue, 21 September, as well as some underlying thoughts on why we continue to see risks tilted towards Fed having to maintain financial conditions restrictive for longer: FX Strategy – The bullish case for high US interest rates, 22 September.
Bank of England hiked by only 50bp yesterday, in line with our expectations but less than what markets had priced in. Recession risks are rising in the UK amid the rapid decline in purchasing power, but we continue to expect further hikes in the coming meetings, see Bank of England Update – Review: another 50bp hike and we expect more to come, 22 September. Norges Bank also hiked by 50bp, but as it was among the first to start hiking last year, we also think it could be among the first to bring the hiking cycle to a halt, we are only looking for one more 25bp hike in the November, read more in Scandi section below.
The few outliers among the hiking central banks are found in Turkey, where the CBRT continued its unorthodox monetary policy by cutting rates by 100bp despite the soaring inflation, as well as in Japan. BoJ made no changes to its dovish policy stance, but later it was announced that the Ministry of Finance had instructed it to intervene in the FX markets to limit the rapid JPY weakening for the first time since 1998. Despite this, BoJ is still conducting monetary policy which sends more yen into the market, and we think the pressure to abandon the yield curve control has increased. Read our take in Research Japan – Bank of Japan intervenes to support JPY, 22 September.
European recession fears got further boosted by the September Flash PMIs, which signalled broad based weakening in the growth outlook. Especially the manufacturing sector is under clear pressure due to a steepening decline in new orders but also rising input costs due to the energy crisis.
This weekend, we will focus on the Italian elections, where the right-wing coalition’s win looks like a done deal. Giogia Meloni’s party Brothers of Italy has increased its lead in the latest polls, and the focus will be on the margin of victory. Read our preview here: Italian Politics Monitor – Unchartered territory, 9 September.
Markets will continue to digest this week’s central bank meetings, and in the Euro Area main focus will be on Friday’s September Flash HICP figures, consensus is looking for another uptick to 9.4% y/y. In the US, focus will be on a wide range of Fed speakers as well as the August private consumption expenditures data out on Friday. In China, August PMIs will be released on Friday morning, we continue to see downside risks amid weakening export demand outlook.