Challenging Week Ahead

Other central banks meet next week. The Reserve Bank of Australia (Aug. 3) meets with rising cases in Sydney, despite the lockdown and the economic fallout being picked up in some recent data, including June's preliminary retail sales (-1.8% month-over-month, more than twice the decline expected) and a flash composite PMI crashed to 45.2 from 56.7. It looks likely to provide more support through stepped-up bond buying. The RBA is currently buying A$5 billion a week and may increase by A$1-2 billion.

The Bank of England also meets (Aug. 5). Rising inflation and an economy clearly on the mend have seen a few MPC officials turn more hawkish. The risk of a dissent in favor of a reduction in bond purchases may have increased, but until the furlough program concludes at the end of September, the health of the labor market is not clear.

Nevertheless, the market appears to be pricing in a hike in the second half of next year. Early signs that the wave of infections may be slowing may have lent support to sterling. Meanwhile, the 10-year Gilt yield hovers around the 200-day moving average (0.55%) after peaking slightly above 0.92% in mid-May. 

Four central banks from emerging markets meet next week. Thailand is the least likely to alter policy. India is unlikely to change rates but will announce its August bond purchases. The RBI may have to recognize and tolerate slightly higher inflation. The Czech central bank began a tightening cycle in June and most likely follow-up with another 25 bps rate at the Aug. 5 meeting. Another 50 bps of increases appears to be discounted before the end of the year. 

Brazil's central bank has hiked the Selic rate by 225 bps this year (to 4.25%) with three 75 bps rate hikes. Inflation is still accelerating (the IPCA measure stood at 8.35% year-over-year, a five-year high. With the economy seemingly on the course for a strong recovery and the currency off around 2.4% in July, the central bank may be emboldened to deliver a 100 bps hike.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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