Investors await crucial central bank meetings as conflicting economic signals create market volatility
Investors are eager for clarity on global monetary policy this week after mixed signals from major economies unsettled markets, according to BNN Bloomberg.
Key central banks are set to meet: the Bank of Japan and the Federal Reserve on Wednesday, and the Bank of England on Thursday. Traders are debating if the BoJ will hike interest rates, and speculating on when and by how much the Fed and BoE will cut rates.
This uncertainty has led to fluctuations in the yen and pound, and a decline in short-term U.S. Treasury yields. Multiple markets ended last week on edge due to unclear policy and economic growth prospects.
“This week will be more interesting,” said Wong Kok Hoong, head of institutional equities sales trading at Maybank Securities Pte. in Singapore. “And maybe more tiring.”
Market uncertainty surrounds the BoJ’s potential actions after years of rarely adjusting rates. Governor Kazuo Ueda has made few public comments before the policy meeting. Recent data show accelerating inflation but disappointing consumer spending.
The possibility of further policy tightening drove the yen to an almost three-month high last week, strengthening by about five percent against the dollar since July 11. Suspected intervention due to currency weakness also contributed to this trend.
Option traders’ bets on a rate hike shifted dramatically, moving from below 40 percent to nearly 90 percent before settling in between. Economists are also uncertain, with just 30 percent forecasting an increase, but over 90 percent seeing it as a risk, according to a Bloomberg survey.
The yen’s connection to leveraged investments through carry trades has shown that sharp swings can quickly impact global markets. The recent climb affected popular currency strategies, including the Australian dollar and Mexican peso.
Inaction from Ueda could leave yen bulls vulnerable, especially if policymakers also disappoint expectations for a sizable cut to bond purchases.
Currency bears face threats if the Fed does anything on Wednesday to boost hopes for US rate cuts. The yen traded steady at around 154 per dollar on Monday.
“I’m still in the yen bear camp, although there are massive two-way risks going into the big week,” said Charu Chanana, head of FX strategy at Saxo Capital Markets. “Expecting the BoJ to hike rates and tweak its bond buying both in a single meeting seems to be a stretch for a central bank that is inherently dovish by nature.”
Investors will scrutinize the Fed’s policy announcement and Chair Jerome Powell’s remarks on Wednesday for signs supporting a possible interest-rate reduction in September.
Such a move would align with economists and swaps traders, who anticipate two quarter-point cuts this year, with a roughly 70 percent chance of a third. The Fed’s benchmark is currently in a range of 5.25 to 5.5 percent, a peak reached a year ago.
Policymakers have highlighted a balanced labour market and decreasing inflation, suggesting a growing case for lower borrowing costs in the world’s top economy.
“The upcoming FOMC will be used to lay the groundwork for a September rate cut as the Fed makes the case for moving policy from restrictive territory toward a more neutral footing,” said James Knightley, chief international economist at ING.
Some market watchers, including former New York Fed president William Dudley and Mohamed El-Erian, argue for more aggressive easing.
In separate Bloomberg Opinion columns, Dudley suggested the Fed consider reducing rates this week, and El-Erian warned of a “policy mistake” if rates remain too high for too long.
Treasuries are on track to end July with a three-month winning streak last seen in mid-2021. Rising conviction about rate cuts helped a Bloomberg index of US government debt reach a two-year high this month.
Two-year bonds have rallied on expectations of easier monetary policy, narrowing the yield gap with 10-year notes.
US stocks enter the week on somewhat shaky ground, partly due to corporate earnings reports raising doubts about consumer strength. The S&P 500 Index last Wednesday ended its longest stretch without a 2 percent decline since the global financial crisis in 2007. Stocks rose on Monday.
Volatility in the market highlights the importance of this week, which will also include a US jobs report and corporate results from Meta Platforms Inc., Microsoft Corp., and Apple Inc., among others.
Markets are divided on whether the BoE will deliver its first rate cut since the pandemic on Thursday, reducing it from the current 5.25 percent.
While inflation has eased from double digits a year ago to the central bank’s 2 percent target, unemployment is up, price growth in the services sector remains high, and the economy has bounced back from a small recession.
A 10 percent rise in the minimum wage in April and the new Labour government’s plan for above-inflation pay rises for up to five million public sector workers pose upward risks to prices.
Since the July election, three Monetary Policy Committee hawks have opposed easing, while only one dove has supported it.
Regardless of the outcome, the decision will likely impact bonds and the pound. On Monday, swaps priced a 50 percent chance of a quarter-point reduction this week, with two such moves this year seen as nearly certain.
Economists expect the BoE to shift. Bank of America Corp., Deutsche Bank AG, and Nomura Holdings Inc. anticipate a five-to-four vote in favour of a cut this month. ING Groep NV expects six to back the action. Bloomberg Economics also predicts a reduction.
“In what is a big week in terms of important data points, the BoE meeting on Aug. 1 is very much live and comes with updated forecasts,” said Orla Garvey, senior portfolio manager for fixed income at Federated Hermes Limited.
A rate cut would boost UK government bonds, already buoyed by prospects of monetary easing, and hopes for political stability following the Labour Party's landslide election victory. The yield on two-year gilts is at its lowest in more than a year.
For the pound, a rate cut could reduce its appeal in carry trades. Sterling is the best performer in the Group-of-10 this year, with big banks and investors, including JPMorgan Chase & Co. and Amundi, forecasting gains to US$1.35, almost a 5 percent advance from current levels. Bullish bets are at their highest on record.
The currency remained steady at around $1.29 on Monday.
“Recent market turbulence has unsurprisingly fomented a number of narrative cross-currents pertaining to equities, fixed-income, and other market positioning. It may be dangerous to say, but in some ways this time really is different to what we’ve seen before.”
