No ‘Apocalypse Now’, But Maybe Later – Full Week Ahead Preview

The apocalypse is on hold.

Although the human suffering will no doubt be profound, damage estimates from Hurricane Irma are already being rolled back on Sunday evening as the worst case scenario doesn’t seem to have materialized.

Similarly, Kim hadn’t launched any more ICBMs as of early Asian trading and that prompted the yen to fall versus all its G-10 peers out of the gate. Equity futs rose and gold fell. “The market was already braced for a mammoth hurricane at the end of last week and the pricing of another Fed rate hike any time soon has already dwindled, so there’s scope for a brief relief rally in the greenback and risk assets,” Bloomberg’s Ben Purvis wrote on Sunday evening before warning that “the situation [in North Korea] is on tenterhooks still [and] Monday’s UN Security Council meeting on the rogue state is lining up to be divisive.”

“America will pay due price if it ends up imposing harsher sanctions at the United Nations Security Council on North Korea,” Pyongyang’s Ministry of Foreign Affairs said in a statement, adding that Kim is “ready [and] willing to use any form of ultimate means.”

So you know, there’s that.

Besides the hurricane cleanup and North Korea there are a couple of more notables to look out for in the week ahead. We’ll get the BoE where, as always, the focus will be on the vote count. “We expect a 7-2 vote to leave rates unchanged [but] that said, given the GBP depreciation since the August meeting, we expect rhetoric to be less dovish and with the potential to challenge current rate hike pricing upwards,” BofAML wrote over the weekend, before reminding you that “the relevance of such rhetoric is purely confined to market communication [as] we continue to not expect a rate hike before 2019.”

“We expect no rate change on a 7-2 vote,” Goldman chimes in. “Overall, we expect the Committee to reiterate that ‘monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve’ but without adding significantly to the urgency for an immediate rate rise beyond the 2 votes for a rate hike.”

There’s also the SNB, which is particularly notable in light of the franc plunge that unfolded a couple of months ago in the face of what markets perceived to be a more hawkish Draghi and a still dovish Jordan. But a little bit of welcome depreciation isn’t going to be nearly enough in terms of triggering any kind of policy reaction. Basically, they can’t risk being anything but dovish – especially not in an environment where havens are panic bid every time the words “north” and “Korea” are used in the same Bloomberg headline.

“It doesn’t make any sense to jeopardize the recovery by tightening our monetary policy,” Jordan said in an interview with Finanz und Wirtschaft published earlier this month.

He did acknowledge that the franc’s recent weakening against the euro helped in terms of the franc’s “significant overvaluation,” but went on to say that the situation is still tenuous. “We don’t know if the short-term movements we see in the markets are sustainable,” he concluded.

Here are a couple of bullets from Goldman:

• On communication, we expect the SNB to take note of the depreciation of the Swiss Franc in Q3. Upward revisions to inflation forecasts are likely. Still, the associated easing in Swiss financial conditions has merely served to partly offset the excessively tight monetary policy stance of the SNB (which has refrained from cutting rates further of late despite weak growth and inflation). A further persistent depreciation of the Swiss Franc is needed to counteract the set of pervasive negative second-round effects that threaten Swiss growth and inflation.
• As yet, the elevated level of policy uncertainty, both in Europe (e.g., the Catalan independence referendum, the upcoming Italian elections in 2018, the ECB’s drawn-out tapering amid subdued inflation and high debt levels) and in the rest of the world (e.g., North Korea’s nuclear tests, the Fed’s inflation situation), warrants some caution before translating Swiss Franc moves into monetary policy actions.

Right. In fact, they’d probably sell assets before they’d move on rates. Here’s a Goldman chart from July:

On the data front, we’ll get CPI in the U.S., which is of course notable and will take on even greater significance this week ahead of the Fed, on the heels of an abysmal August payrolls report, and as yields and the dollar remain subdued.

There’s also Sweden CPI which should be good for a laugh considering some of the criticism that accompanied the Riksbank meeting.

Again, it feels like this week’s market-moving events are likely to be unscheduled. Remember, Irma is still a catastrophic natural disaster even if it didn’t quite turn into a scene out of a bad Jake Gyllenhaal movie. And as the above mentioned Ben Purvis notes, “Kim Jong Un [could decide] to inject himself into the conversation again,” at any time.

Here’s the full calendar via BofAML: