Market Review & Outlook: A Parade of Unmoving Central Banks

September’s parade of major central bank decisions began in earnest this past week and the results can be summed up in one word – unchanged. The week began with the Reserve Bank of Australia (RBA), following through with the Bank of Canada (BoC), and ended up with the European Central Bank (ECB). All three central banks opted, as expected, to keep interest rates and monetary policy essentially unchanged.

The upcoming two weeks bring even more critical central bank events, starting with the Swiss National Bank (SNB) and Bank of England (BoE) late next week, followed by the long-anticipated US Federal Reserve, Bank of Japan (BoJ), and Reserve Bank of New Zealand (RBNZ) in the subsequent week. These events will also occur alongside a plethora of key economic data releases that should help to guide some of the central bank decisions.

The unmoving trend of this past week began with the RBA decision, in which Governor Glenn Stevens made his last appearance leading Australia’s central bank. The RBA had previously cut rates in both May and August to progressively lower record lows, but kept the cash rate unchanged on Tuesday at its current low of 1.50%. Though this was widely expected, the Australian dollar surged as the RBA announced that it would refrain from cutting rates further for the time being.

Also as expected, the Bank of Canada left its target for the overnight rate steady at 0.50%. The BoC statement asserted that "the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate." Two rate cuts were made in 2015, but none have been made this year thus far, and none are expected for at least the balance of 2016 and into 2017.

Finally, the ECB refrained from extending its asset-purchase program on Thursday, leaving monetary policy unchanged and citing no need for additional stimulus at the current time.  Overall, the ECB statement and press conference skewed somewhat towards the hawkish side, at least more hawkish than many had been expecting. As a result, the euro surged sharply in the immediate aftermath of the decision.

For the major upcoming central bank decisions, the Swiss National Bank and Bank of England are both also expected to keep monetary policy unchanged. The BoE is not expected to move again after it cut its bank rate to 0.25% in August on post-Brexit concerns. Since then, recent UK economic data has shown that those concerns may have been largely unwarranted.

This brings us to the Bank of Japan and the US Federal Reserve, which are both scheduled to meet in less than two weeks. As for the BoJ, reports on Friday that Japan’s central bank was considering more monetary easing and cutting rates further into negative territory initially weighed on the yen. This rhetoric, however, has been ongoing for quite some time as the yen has continuously strengthened, much to the consternation of Japanese officials. Whether the BoJ actually follows through this time, however, remains to be seen. If it does occur, the weakening effect on the yen could well be rather dramatic, at least in the immediate aftermath.

What also remains to be seen is the highly anticipated September decision of the always-mystifying Fed. Virtually on a daily basis, economic data and utterances from key Fed officials have swayed the speculation either way. The past week has seen weak US economic data in the form of worse-than-expected releases regarding employment (NFP), manufacturing, and services, that have lowered the market’s view of a September rate hike. On Friday, however, Boston Fed President Eric Rosengren sounded rather hawkish with his comments warning about the risks of delaying a rate increase. These comments boosted the dollar and pressured US equities as they immediately heightened market speculation over a September hike. The speculation was tempered, however, when Fed member Daniel Tarullo said that he wanted to see higher inflation and more job creation before raising interest rates, but that a rate hike this year is possible. The futures market’s implied probability of a September rate hike rose above 30% after Rosengren’s comments, but then fell back to 24% on Tarullo’s. Overall, the back-and-forth continues, and either way the decision goes, it will likely be a surprise to the financial markets with significant consequences particularly for the US dollar, gold, and the equity markets.

Along with the continuing parade of central bank decisions in the coming two weeks, key economic data will also be released that will likely have a significant impact on some of those decisions. For the UK, this will include: consumer price index, employment, and retail sales. For the US: producer price index, consumer price index, retail sales, consumer sentiment, weekly jobless claims, and the Philly Fed Manufacturing Index. Other important data releases will include China’s industrial production, German economic sentiment, New Zealand GDP, Australian employment, and Canadian manufacturing sales.

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