The Fed’s not the only central bank game in town this week. In fact, the July FOMC meeting — assuming it’s the non-event that it should be — is easily the least dramatic policy gathering.
Both the Bank of Japan and the Bank of England meet in the days ahead, and they may both move. In opposite directions.
I don’t want to spend too much time previewing the BoJ’s July meeting and the BoE’s August gathering given there’s a chance both banks will stand pat, but I’d be remiss not to quickly note the possibility of a first cut from Andrew Bailey and a second hike from Kazuo Ueda.
Starting with the BoJ, the yen’s news. Specifically, the currency’s 6% rally in the space of two weeks was indicative of a painful squeeze and it sparked an global carry unwind that spilled over into risk sentiment.
As the figure shows, the currency’s on a tear, and the rally faces a reckoning this week.
In the simplest possible terms, if the BoJ doesn’t hike, give some indication as to when they might, sketch the contours of a plan to shrink their mountainous pile of JGBs or some combination of those prospective outcomes, the yen could reverse, and all the associated carry trades could come roaring back.
Part and parcel of the currency’s whiplash-style reversal from historic lows was the perception that the BoJ’s pondering another step down the road to dismantling the bank’s long-running experiment in ultra-accommodative monetary policy just as the Fed’s set to embark on cautious rate cuts.
The scope and rapidity of the yen’s surge means the bar for Ueda to justify the yen rally is very high. Too high to clear, most likely, especially considering who we’re talking about: This is still the BoJ. A “hawkish” BoJ is like a “well-behaved” toddler. Besides, even in the most hawkish scenarios, the yen will still be a low-yielder. In perpetuity.
In the UK, it’s time to cut. Probably. The last inflation update (covering June, obviously) showed the headline running right at target for a second month.
Services inflation’s still very elevated but they can’t wait around on that. At 3.5%, core’s uncomfortable, but, again, they can’t really wait around without running an unacceptably high risk of triggering a recession.
The BoE hiked 14 straight times and the outlook for the UK’s uncertain even as post-pandemic/war-time uncertainty goes. Just ask Rachel Reeves, who on Monday will describe the UK as a “broke and broken” country bedeviled by a veritable Venn diagram of overlapping crises brought on by 14 years of misguided Tory populism.
Recall that the BoE’s June meeting was a “finely balanced” hold. I suggested at the time that an August cut was “highly likely.” We’ll see if I was right this week.
Traders have the BoE meeting at a coin toss. Unfortunately, this is a forecast meeting, which means market participants will be subjected to a new set of projections from the bank. The BoE’s track record in that regard was so bad post-pandemic that they called in Ben Bernanke to help fix it.
Traders looking for policy hints from Bailey were left wanting recently. “By the time of the [August] decision, the UK central bank chief won’t have spoken publicly for more than 10 weeks,” Bloomberg recently observed. “Barring a single-sentence statement after the June rate meeting, that’s his longest period without communicating in over four years as governor.”
So, as you prepare for a monumental week of macro releases and tech earnings, not to mention what’s sure to be a never-ending firehose of political headlines from the US, make room for the BoE and the BoJ.
