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Federal Reserve in focus


The release of Switzerland’s September 21st Domestic Bank Sight Deposits will be watched as a leading indicator for FX intervention. Italy’s potential standoff with the EU on its national budget and Brexit are the culprits behind recent Swiss Franc (CHF) appreciation.  An increase in domestic bank sight deposits will suggest the Swiss central bank is preparing to intervene in the currency market. Additionally, Canada’s August Wholesale Trade Sales will be released ahead of the US Dallas Fed Manufacturing Activity Index. Last week saw a disappointing manufacturing survey from New York while Philadelphia outperformed. However, a common theme was rising input costs with trade tariffs taking effect. Lower new orders and shorter delivery times in the August Dallas report suggests the headline index may moderate in September. The Chicago Fed National Activity Index will also be released. European Central Bank (ECB) President Mario Draghi will also speak on the controversial topics of the risks of excess liquidity and central bank communication.


The Bank of Japan (BoJ) will release its September meeting minutes overnight, followed by Governor Haruhiko Kuroda’s speech early in the European morning. The first main release of the day is the Federal Housing Finance Agency House Price Index. US house prices continue to march higher, adding to affordability concerns in the sector. The index showed some signs of deceleration in the second quarter. Surveys show that consumers view high house prices as the worst condition for buying since October 2006, right before the crash. The Richmond Fed Manufacturing Index is expected to show slight moderation in activity in US mid-Atlantic factories after a six-month high in August. US Conference Board Consumer Confidence is forecast to moderate in September after reaching a cyclical high in August. The index suggests that consumer demand is in no danger of slowing and the jump in the income expectation sub-index suggests wage pressures are coming.

Tuesday has a full speaker schedule, so headline risk will be key for markets. The ECB’s Chief Economist Peter Praet will deliver the opening remarks at a summit titled ‘Rebalancing Return and Risk Amid Global Recovery’. Uber dove Gertjan Vlieghe of the Bank of England (BoE) delivers a speech with a Q&A session before the ECB’s Praet is up again speaking on the low interest rate environment and consequences of unwinding asset purchases. The ECB’s Benoit Coeure, usually a more dovish board member, chairs a research conference.


Before the Federal Reserve makes its long-awaited policy decision, the last economic release will focus on the one sector of the US economy that is underperforming. MBA Mortgage Applications and New Home Sales will provide an insight into the housing market, which is grappling with high house prices, labour shortages, and higher mortgage costs. Housing Starts were better than expected in August supporting an increase in New Home Sales however the drop in Building Permits suggests moderation is coming.

With booming job creation and above-target inflation, the Fed is almost guaranteed to raise rates in September. Bloomberg calculations show the rates market is pricing in 100% probability of a September rate hike. The focus will be on rate increases further out on the policy horizon. The first clue is the dot plot rate projections by Fed board members. With the Treasury curve approaching inversion, how much is this weighing on policymaker decisions? The 2019 and 2020 rate projections as well as end-2021, which will be included for the first time and will be key to watch. Second is the inclusion or removal of the description of current monetary policy as ‘accommodative’. With the rate now approaching neutral territory, continuing to describe current monetary policy as ‘accommodative’ would suggest that the Fed shares Lael Brainard’s view that fiscal stimulus and rising asset prices means the neutral rates is now above the long-run estimate. This would be hawkish at the margin. A new set of economic and inflation projections will also be published. Recent data supports projections for continued growth, but there is the risk that forecasts incorporate the impact of newly announced tariffs. Based on the tariffs to date, however, this effect is likely to be negligible.


Italy must present a new 2019 budget proposal by Thursday, potentially setting the stage for a standoff with the EU. The Italian Prime Minister (PM) and Finance Minister’s recent comments suggest a rollback of their campaign promises of spending increases that have unnerved financial markets and sent Italian borrowing costs soaring back in May. However, Deputy PM Salvini’s talk of a ‘courageous’ budget has kept EUR risk premium high. We believe the Finance Minister and PM will stick to their recent budget guidance, knowing not to gamble their credibility with financial markets, and announce a deficit no deeper than 2.0% of Gross Domestic Product (GDP). This should lead to a relief rally for Italian bonds and the Euro. Instead, the conflicting comments between the two coalition parties suggest the potential for a 2019 Italian general election. The League may wish to capitalise on their polling gains while their coalition partners lose their share of voters.

The Eurozone M3 Money Supply will be released Thursday. The annual growth rate has begun to drop and may fall further as the ECB begins winding down into net asset purchases from October. The ECB is also due to publish its Economic Bulletin, and measures of Eurozone confidence will follow.

In the afternoon, the US releases August Wholesalers Inventories. The broad decline in the inventories to sales ratio suggests a strong US manufacturing sector. The third estimate of US GDP is expected to confirm the 4.2% expansion in Q2. August Durable Goods Orders should be boosted by transport orders, with Boeing receiving 69 extra aircraft orders from July and motor vehicle orders 4.0% higher on the month. The core measure of Durable Goods Orders is likely to paint a more subdued picture, though still reflecting strong manufacturing demand. US September Initial Jobless Claims, Continuing Claims, Bloomberg Consumer Confidence and August Pending Home Sales will also make their way onto the market. New Zealand’s August Building Permits will be announced overnight.  

There is a heavy speaker calendar on Thursday, with the BoE’s hawkish Chief Economist Andy Haldane, ECB President Mario Draghi, BoE Governor Mark Carney, ECB’s Praet, the Fed’s Jerome Powell and Robert Kaplan, and Bank of Canada (BoC) Governor Stephen Poloz all speaking at separate events.


Key Japanese data will be released in the early hours, including the September Tokyo Consumer Price Inflation (CPI), August Jobless Rate, Industrial Production, and Retail Sales. Meanwhile, Australia’s August Private Sector Credit is expected to continue to slow gradually. Final revisions to UK trade data suggest the risk to the final revision of UK Q2 GDP is to the upside, though only in the order of hundredths of a percentage point. US’s strong jobs and average hourly earnings growth suggest Personal Income growth continued in August. Subdued retail sales suggest a moderation of August’s Personal Spending, but the real focus will be on the August Core Personal Core Expenditure (PCE) growth. The Fed’s preferred measure of price growth was sitting right on the Fed’s target in July. A tick or two higher will further increase market rate hike expectations. The US September Chicago Purchasing Manager Index and September final University of Michigan Sentiment will also be revealed. The ECB’s uber-dove Praet is also scheduled to speak on macroprudential policy, and the BoE’s dovish Ramsden will deliver a speech at the Society of Professional Economists.