Central Banks in Focus
With the turning of the month, the focus has shifted to the plethora of central bank meetings that are scheduled for the upcoming weeks. Volatility has also increased recently as investors gauge whether the outcome from CB meetings meet, exceed or fall short of expectations. So far, most meetings have either resulted in stable or lowering rates. China started off the week, or actually the weekend, with a surprise cut to their special lending rate, in a sign that business growth continues to decelerate. This was matched by rate cuts from India and Poland, which were both deemed as surprises and came as a response to combating slowing inflation/deflationary concerns. However, there were also some pauses to the race to zero yields, with both Canada and Australia keeping rates unchanged after cutting them earlier this year. While they continue to be open to further cuts later in the year, the recent stabilization in energy prices and prior rate cuts have prompted them to wait and see if there is a positive impact from their prior actions. We view this as significant and one of the more important data points to develop as we go into the largest central bank meetings. In particular, the ECB and BOE will meet tomorrow, with neither expected to change their stance from earlier this year. The ECB has already unloaded its bazooka and we expect to be treated to the details of their QE program, which promises to buy ???60billion in sovereign bonds, ABS and covered bonds. We expect that up to ???45 billion will be in the sovereign bonds, with the balance split evenly in the ABS and covered spaces. Execution will be key as there remains considerable concern/skepticism as to whether the ECB will hit its balance sheet targets. The BOE will remain on hold this week, but will likely maintain its view that a rate hike is the next move, although the market continues to assign a later lift off date on weakening inflation data. The moves and commentaries from the ECB and BOE, nonetheless, highlight the continued divergence of monetary policies amongst the largest developed economies. This will certainly hit home when the Fed and the BOJ meet in the middle of the month, with the Fed expected to drop its forward guidance and stress data dependency as a trigger at any forward meeting. We continue to assign the greatest odds for a September/October rate hike, with Jackson Hole likely playing a prominent role in this messaging once again.