The three main central bank policy decisions to watch this week will be the Fed (Wednesday), the ECB (Thursday) and the BOJ (Friday). So what are the markets expecting and is there room for surprises?
- Fed funds futures show nearly 100% price for 25 bps rate hike as seen here
- Money markets also price almost 100% (99.8%) for the ECB to raise rates by 25 basis points
- After Ueda tempered market expectations, the view is now that the BOJ will not change policy
So, amid all this, what is each central bank’s propensity to surprise?
Let’s just get the ECB out of the way because a 25 basis point rate hike is very much a given. It won’t be anything other than that, and the central bank is likely to stick to its more data-driven communication, leaving the door open for the next move in September without explicitly confirming it.
Then we have the Fed. How I’d like to think that Powell & co. perhaps to our surprise, they did nothing to quell or temper market expectations of a 25 basis point rate hike when they had the opportunity earlier this month. Softer inflation numbers for June threw market players a bit of a curveball, but policymakers should play it straight this week.
It basically reaffirms their belief that June was indeed just a “blip” and that they are determined to keep rates higher for longer to dampen inflationary pressures.
That said, the central bank that could really and truly surprise the markets this week is certainly the BOJ.
Since Ueda took over as governor, only the bulls have been poised for disappointment since April, and this looks like another example. He spoke out last week to claim they were committed to easy policy, dashing the hopes of market players who had hoped he would have something lined up for a policy change this week.
In the past few weeks, there have been some quarters in the market that believe the time has come for the BOJ to intervene. However, those calls have now died down again, with the currency itself falling heavily as a result just last week.
So, if the BOJ does surprise, it would be rather contrary to last week’s report (and recently), which will be a real surprise if they make an adjustment to their yield curve management (YCC) policy.