Your browser does not support JavaScript! Pls enable JavaScript and try again.
US Fed

FX

Fed FOMC meeting this week - focus to shift to dot plot and economic projections

  • USD: The US University of Michigan consumer sentiment index (data released Friday) increases for the third month in a row from 58.2 in August to 59.5 in the September preliminary number. This seems to be mainly driven by the improvement in consumer expectations (up to 59.9 from 58), which have been on an upward trend this summer. The most important part of the report though are the inflation expectations that decline in the September preliminary number with 1Yr inflation expectations down from 4.8% to 4.6% and the 5-10Yr inflation expectations median also down to 2.8% from  2.9%.
  • USD: Stabilizing longer term inflation expectations in the consumer sentiment survey is likely to provide some comfort to the Fed and makes a 100bp rate hike at this week’s FOMC meeting unlikely while at the same time, cementing the case for a 75bp hike. But with a 75bp hike at this week’s Fed FOMC meeting now fully discounted, investor attention will likely shift to the Fed’s quarterly update to its economic forecasts and dot plot for signs of peak hawkishness and the timeline accompanying that.
 

Swiss National Bank (SNB) meeting this week – a 100bp hike this week?

  • CHF: At their last meeting in June, the SNB not only – somewhat surprisingly at the time – raised the policy rate by 50bp before the ECB followed suit, but also introduced two-way flexibility for FX intervention. SNB President Jordan explained after the meeting that the Franc had depreciated in trade-weighted terms and was therefore no longer “highly valued” and would aggravate the problem of imported inflation. And following the June meeting, total sight deposits at the SNB did shrink, suggesting that the central had stopped FX intervention to weaken the Franc. As a result, CHF appreciated against the euro, well through parity and also appreciated in trade weighted and real terms back to levels at the start of the year. By August however, the appreciation seems to have gone too far for the SNB and it resumed tentative FX purchases to weaken CHF though that did not last long given the huge geopolitical risks facing the euro area that led to more inflows into CHF out of EUR (and GBP). SNB may have perhaps concluded that intervention under these circumstances would be rather futile. 
  • CHF: That said, it is doubtful the SNB will want to allow too far a widening in interest rate differentials between CHF and EUR for fear of weakening the Franc and diluting its fight against inflation. But matching the ECB poses a challenge, because SNB has only half the number of scheduled meetings per year. Therefore, its hiking steps would need to be double the size. Citi analysts therefore expect a 100bp rate hike from the SNB this week to 0.75% with a terminal rate of 2% by year-end, which could require a 75bp rate hike between the scheduled meetings, perhaps in October. That would leave another 50bp for the December meeting.
 
UK retail sales plummet in August but BoE still expected to hike 75bp this week
  • GBP: UK retail sales (incl. auto fuel) fall in August by -1.6% MM after a rise of 0.4% MM in July, meaningfully undershooting consensus expectation for a -0.5% MM decline. Most of the main underlying sectors see a noticeable decrease as UK consumers continue to be under pressure from rising prices. Therefore, this Thursday and Friday will likely prove a critical moment ahead of the looming winter crunch, with the delayed BoE MPC meeting announcement set for Thursday, and then a fiscal announcement on Friday. Citi analysts expect the MPC to opt for a 75bp increase while for the fiscal announcement, Citi analysts expect the UK Chancellor to set out plans for the £2,500 price cap, £40bn in business support, as well as the promised £30bn in tax cuts. Perhaps most interesting will be the costing for the Household Price Cap, which could range between £100-110bn. 

Week ahead: 4 board meetings – Fed FOMC, BoJ, BoE and SNB

  • USD: Fed FOMC - Citi analysts expect the Fed to hike by another 75bp to bring the cash rate to 3.00-3.25%. More important will be the Fed dot plot and economic projections and there remains a hawkish risk that median expectations for the fed funds rate in the Summary of Economic Projections increases significantly from their June values and that median dots rise to 4.0-4.25% for 2022 and around 4.5% in 2023. In the press conference, consensus expects Chair Powell to sound similar to his speech at Jackson Hole.
  • JPY: BoJ monetary policy meeting - Forex intervention and monetary policy change not in the forefront of yen depreciation countermeasures – Citi analysts expect the BoJ to keep monetary policy unchanged at the September 21-22 MPM, having maintained its stance that monetary policy is not targeted at forex in the midst of sharp yen depreciation against the dollar. The policy statement may be revised to reflect the termination of pandemic supports but the team expects the downward bias on policy rates to be retained.
  • GBP and CHF: BoE Bank Rate: Citi Forecast 2.50%, Consensus 2.25%, Previous 1.75% - refer to the piece above;  Switzerland: SNB Policy Rate: Citi Forecast 0.75%, Consensus 0.25%, Previous -0.25% (a 100bp hike expected by Citi analysts versus 50bp consensus) - refer lead article.
  • EUR: Euro Area: Consumer Confidence, September: Citi Forecast -24.0, Consensus -25.0, Previous -24.9 (energy bills, fiscal support up); Euro Area: PMI Manufacturing, September: Citi Forecast 48.0, Consensus 49.0, Previous 49.6 (sliding towards recession); PMI Services, September: Citi Forecast 48.5, Consensus 49.0, Previous 49.8; PMI Composite Output, September: Citi Forecast 48.3, Consensus 48.1, Previous 48.9.
  • GBP: UK GfK Consumer Confidence, September: Citi Forecast -41, Consensus -42, Previous -44 (starting to plateau); UK PMI Manufacturing, September Flash: Citi Forecast 47.5, Consensus 47.4, Previous 47.3; PMI Services, September Flash: Citi Forecast 50.8, Consensus 49.0, Previous 50.9 (stabilizing).
  • CAD: Canada CPI NSA MoM (Aug) – Citi: -0.1%, median: -0.1%, prior: 0.1%; CPI YoY – Citi: 7.3%, median: 7.2%, prior: 7.6% - Canada’s headline CPI should decline 0.1%MoM with shelter prices expected to continue to slow with a further moderation in home prices. However, market attention is likely to be more focused on core CPI and inflation expectations as key inputs into BoC’s assessment of how high rates need to rise. While there are some signs that core CPI could be moderating slightly by year end, Citi analysts see risks skewed towards core CPI remaining at an uncomfortably high level that keeps BoC raising rates for longer and/or by large amounts.