Welcome to Prattle’s “Weekly Review and Preview.” Each week, we analyze the most important communications from the previous week and give our thoughts on upcoming releases.
Last week tensions at the Fed rose as the internal rift over an upcoming rate hike continued to grow. Other major central banks also made headlines as the European Central Bank, the Reserve Bank of Australia, the Bank of England, and the Reserve Bank of India all released their own market-moving announcements.
Speeches made by Fed officials revealed that the FOMC is divided into three camps. The first and most moderate, consisting of traditional doves Eric Rosengren of the Boston Federal Reserve and Charles Evans of the Chicago Fed, is advocating a gradual rate hike path and reminding markets to price in rate increases this year.
Loretta Mester of the Cleveland Fed and Esther George of the KC Fed fall into a second, more hawkish camp, championing a steeper rate hike path.
Dudley, a dovish balance between these hawks, represents the third, expressing continued skepticism about global financial stability.
The FOMC Minutes appeared to be somewhere between the moderates and the doves–preaching caution while still anticipating multiple rate hikes this year. This is exemplified by their neutral score of 0.09.
European Central Bank officials Peter Praet, Vitor Constancio and President Mario Draghi all made remarks to counter a recent press conference in which Draghi “misfired his bazooka” and expressed his unwillingness to lower rates further. Each official stated that the bank is now willing to pursue exotic policy instruments if necessary to maintain price stability in the region, including future rate cuts. This is shown by an average dovish score of -0.54
This newfound unity is somewhat surprising given that Praet dissented from the last rate drop due to concerns about the long run impact of negative rates.
The statement released by the Reserve Bank of Australia after their monetary policy meeting announced a hold on rates, keeping with our forecasted neutral trend. However, concerns that the strengthening Aussie dollar could interfere with a transition in the broader economy, coupled with a dovish speech from Deputy Governor Christopher Kent, is increasing speculation about rate cuts later in the year.
The spectre of Brexit looms tall over the Bank of England (BOE), and the topic will likely be integral to their policy meeting later this week. The bank‘s Financial Policy Committee Meeting Minutes–with a neutral score of 0.3–suggested that many key decisions are on hold, citing an “uncertainty…around the forthcoming EU referendum.” The minutes also stated a need for a further buffer due to elevated downside risks and concerns about the effectiveness of monetary stimulus at the zero bound.
On Monday of last week the Reserve Bank of India lowered rates by 25 bps, a policy decision predicted in last week’s review/preview due to the dovish trend in the bank’s recent communications.
This week will bring several speeches from Federal Reserve policymakers. In addition, the Bank of Canada and Bank of England will have official policy meetings, both of which are anticipated to hold policy steady due to current economic conditions.
Federal Reserve speeches scheduled this week from Dudley, Lacker, Harker, Williams, Lockhart, and Evans should provide vital insight into the evolving camps at the Fed. It is likely that these speeches will contain continued hawkish signals that will motivate the futures markets to begin pricing in at least one, if not two, rate hikes this year.
This week’s Bank of England policy meeting is likely to maintain the “wait and see” approach as Brexit concerns are still paralyzing policymakers and forcing them to focus on elevated downside risk. Our algorithm has the BOE trending neutral, and we do not expect them to surprise this week.
The Bank of Canada policy meeting will likely hold rates for a different reason–optimism over rising oil prices and the effect on the Canadian economy. We also expect the BOC to revise its economic forecasts higher for this year as recent hawkish sentiment has driven the loonie up.
Finally, BOJ Governor Haruhiko Kuroda and board member Yutaka Harada will deliver speeches that could point toward further negative rates in Japan.
The Prattle Team