While those views have been largely scaled back, central bank decisions will still be at the front and centre next week.
Even though investors are not looking to the Federal Reserve (Fed) to raise interest rates next week (20-21 Sept), the attention is going to be paid to the language, alongside the latest economic projections. The infamous dot-plot graph will likely show that Fed officials’ projections of future rate hikes are tempered to just one (or none!).
If so, it will contradict the hawkish comments from the majority of Fed officials in recent weeks. It will however support the views of some dovish officials who argued that there is little urgency to tighten policy because inflation remains somewhat elusive. Fed governor Lael Brainard is the most prominent dove so far.
A soul-searching BoJ
At the same time, the Bank of Japan (BoJ) will be deciding on monetary policy. Unlike the Fed, where investors have a binary view (hike or no hike) of the US monetary policy, the BoJ presented a complicated situation. Governor Kuroda has repeatedly stressed that they still have many policy tools at their disposal to support the Japanese economy. These tools refer to the quantitative, quality and negative interest rate policy (NIRP).
But there are growing concerns about the limits of monetary policy’s impact on growth. This was reflected by a split view among forecasters of what the BoJ will do next week. Some predicted there will be an expansion of the QQE programme by ¥10-20 trillion per year. Others say the BoJ may cut interest rates deeper by 10-30 basis points. It’s too close to call.
In addition, the BoJ will announce its decision before the FOMC, so there is no ‘guidance’. Usually, it is the other way round. Apart from the policy decision, the BoJ is expected to publish the results of the comprehensive assessment of its current policy framework. It’s worthwhile to reiterate that the BoJ’s policy objective is to achieve its 2% price stability goal as soon as possible. With that in mind, the review may suggest changes to the current policy framework to accommodate more flexibility. We believe the results will guide BoJ’s moves in the coming quarters, as well as provide clarity on policy direction.
Risk markets wane
The rally in global equities has lost momentum recently amid rich valuations in some developed markets. US stocks have turned a tad volatile since 9 Sep after going through a ‘hibernation’ period. Growing uncertainty of Fed policy and oil fluctuations are primarily behind the increased volatility. While news of strong iPhone 7 demand may lift share prices of Apple and related tech companies as well as suppliers, the overall stock market may not receive much of a fillip in the coming sessions.
Market participants will be hoping for some clues in the coming two weeks, where the Sep FOMC and a discussion between OPEC and non-OPEC producers will take place. Their hope is that developments out from these events will be risk-positive. My guess is they are far likely to be disappointed.