Investors’ attention is now shifting to upcoming announcements from central banks in the UK and Europe, now that the chairman of the US Federal Reserve, Ben Bernanke, has taken the stage and given investors more indication about his intentions for US monetary policy.
At a speech in Jackson Hole, Bernanke pointed repeatedly to the possibility of further stimulus action, but did not give a definitive indication as to when that stimulus might be activated. This disappointed many investors who had been hoping for more concrete information from the Fed.
"Bernanke's Jackson Hole speech hasn't changed much, with further US easing an uncertain prospect the Fed chairman neither ruled in nor ruled out," said Will Hedden, a trader at IG Index.
Looking ahead to next week, the markets will hear from the Bank of England’s Monetary Policy Committee (MPC) and the European Central Bank (ECB). Many consider these announcements to be more important from a global economic standpoint.
Below is commentary from Investec economists, Philip Shaw and Victoria Clarke, about what to expect:
MPC Policy to be Held, Despite Weak Backdrop?
“The UK's MPC is set to announce its latest monetary policy decision at midday on 6 September. We expect that decision to be 'on hold' with rates maintained at 0.5% and the targeted size of the quantitative easing (QE) programme at £375 billion,” writes Clarke in her latest research report. “Over the past month the outlook hasn't shifted drastically, but inflation risks do appear to have nudged up. Even so, we continue to see the Committee backing more asset purchases in November when the current target of £375 billion is reached.”
“The programme of asset purchases sanctioned in July runs through to November, with purchases summing to some £3 billion per week until then,” explains Clarke. “Accordingly much of the focus is on what further easing, if any, the MPC might back at its November gathering. Expectations that further easing could follow this Autumn were raised in the August Inflation Report, when the Committee’s collective view of inflation left the risks to inflation hitting the 2% target (at the two year point) still tilted to the downside ... The Bank also looks to be in the early stages of weighing-up the impact of its (now operational) Funding for Lending Scheme (FLS), with its assessment likely to play into its decision on whether to back further QE this autumn. No conclusion is expected at the September meeting, though we will be looking at the minutes for any indications of the MPC’s early views.”
ECB Bond Purchases Now, Rate Cut Later?
“The ECB Governing Council (GC) meets on Thursday, with two major aspects to the meeting,” writes Shaw. “First, there is the GC’s decision on rates. Second, the GC should release many of the details of its forthcoming bond buying plan to reduce strains in dysfunctional sovereign markets. Clearly the bond scheme is by far the more urgent of the two and something which the ECB cannot afford to mess up. Hence its efforts will be very much centred on the precise modalities of the new programme and the interest rate debate will feature lower down the order of priorities. Bearing this in mind, we are not convinced that the GC will be able to achieve a consensus for a rate move at this stage. Indeed August’s ‘flash’ HICP figures, at 2.6%, show inflation rising faster than expected, possibly deepening divisions on the GC. Our view is therefore that the ECB’s key rates will remain on hold this time (deposit 0%, main refinancing 0.75% and marginal lending rate 1.5%). This is not to say that we believe that interest rates have bottomed or that there is a zero chance of a move. Indeed recent newswire polls of economists are virtually 50-50 on a cut next week. However to us it seems more likely that a further reduction in rates will come later in the year.”
Below, Shaw outlines some points to explain potential bond-buying announcements from the ECB next week:
“Comments during ECB President Mario Draghi’s August press conference, plus subsequent remarks from various other ECB officials, have shed some light on a broad framework for the [bond buying] programme. This seems to be essentially:
i) the ECB will buy sovereign bonds, but only at the request of a country and if certain conditions are agreed to
ii) that the ECB will operate in the secondary market and will only take part providing that the EFSF/ESM buys bonds in the primary market (i.e. at auction)
iii) that it will buy short-term bonds, in contrast with the scheme’s forerunner, the SMP, which purchased paper with a maturity of up to 10 years
iv) that there will be full transparency with respect to which countries participate and the amounts which the ECB buys.
"Other details are not yet known and indeed Draghi and the five other ECB directors skip[ed] the Jackson Hole central bankers’ conference, seemingly to concentrate on finalising the scheme.”
Meanwhile, the Federal Reserve's next policy meeting will be held from September 12-13.
With reporting from Dow Jones Newswires.
