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Macro risks this week

While most analysts are not expecting the Federal Reserve (Fed) to raise interest rates during this week’s FOMC meeting, they are expecting a more hawkish sounding Fed.

Federal Reserve building
Source: Bloomberg

An improved economic outlook with recent good data supported the consensus view that a rate lift-off may be on the cards in September.

However, the Fed is likely to remain ambiguous on the precise timing for the rate move, preferring to err on the side of caution by stressing its data-dependent stance.

Nonetheless, the Fed is clearly not in the mood of surprising the markets, and will make full use of its policy statement to communicate as plainly as possible how it views the various factors (growth momentum, jobs, inflation, etc) affecting the rate decision.

Whether this would help prepare the market for the imminent policy move is difficult to say as sentiments can be swayed at the drop of the hat.

For US, the other thing to watch will be inflation numbers where headline readings should continue to rise on the back of higher gasoline prices. This could keep the reflation trade underway. Stronger data in the US has helped to fuel the selloff in US debt, alongside a rise in global inflation expectations. Yields on the 10-year US treasury almost reach 2.50% last week, and has been rising sharply in the past month or so.

To be sure, FOMC is the focus this week but Greece may also dominate headlines, at least in Europe, after the IMF and ECB walked out of negotiations. Although there are some who think an eleventh-hour deal will be inked, the exasperation of the creditors highlighted the fact that Greece is near the end of the plank. Against this backdrop, ECB President Draghi will be speaking to the EU Parliament on Monday and may be addressing the Greece issue.

In Asia, the rest of the region’s calendar is unlikely to garner much attention, most of the Asian markets’ focus is on the FOMC meeting, unless PBOC announced a policy response.

A pair of central bank events may still warrant some interests. The Bank of Japan’s seventh policy meeting in the first half of the year is expected to show no change in its stimulus programme. However, investors should look out for additional colour to Governor Kuroda’s recent comments on the ‘weak’ yen. Last Wednesday 10 June, his remarks triggered a 1.34% drop in USD/JPY, the largest one-day drop in seven months.

Separately, minutes to the Tuesday 2 June Reserve Bank of Australia (RBA) are more interesting after recent comments from Governor Glenn Stevens. Although the latest meeting yielded a no policy change, the minutes could carry a dovish tone. Governor Stevens said recently that they remain open to the possibility of further policy easing if it is beneficial for sustainable growth. In addition, he remained vocal on the perceived over-valuation of the AUD.

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