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With markets remaining in ultra-accommodative for most of the summer, all eyes are inevitably shifting once again focus on central banks in the developed world; and we’ve got a flurry of key central bank meetings to contend with over the next four weeks or so, apart from the ever so hefty data releases over the days ahead. Clearly, the US Federal Reserve is at a different juncture than its European, UK and Japanese counterparts.
There is talk that the next move in the US is a rate hike, with a close to 50% chance of a December rate hike being priced in, or expected, by market participants. There was talk earlier on this year that the Bank of England’s next move was a rate hike, but we all know how things took a 180 degrees turn following the infamous Brexit referendum vote on 23 June.
In a sharp turn of events, the Bank of England move from considering the gradual removal of its accommodative stance by increasing accommodative measures through the reduction of its Official Bank Rate and the announcement of a fresh wave of Quantitative Easing. On the other hand, the market is expecting both the European Central Bank and Bank of Japan to further increase their already ultra-accommodative stances.
Starting with the US, we have had to contend with mixed market jargon of a possible hawkish in the short term with the acknowledgement that, in the long-term, there are still doubts as to whether the Fed’s monetary-policy framework will be deemed successful and effective or not.
Fed’s Dudley Hawkish comments last week coupled with Lockhart statement indicating his willingness to vote in favour of a rate hike as soon as September highlights the fact that the market might be ignoring the likelihood of a September rate hike, although I think at this stage this could be too premature. The improvement in job gains over the summer months and better than expected economic data overall coupled with a strong equity market performance in the US are all indicative that the Fed could, sooner or later, begin, or rather resume the process of normalising its monetary policy.
We will be following with some level of detail the economic symposium at Jackson Hole between Thursday and Saturday of this which, is expected to be the ideal opportunity for Janet Yellen, the Fed’s Chairperson, Fed chair Janet Yellen with an opportunity to gear the markets, if not for a September rate hike, at best a stronger inclination to a December rate hike, which, any of the two possible scenarios are deemed to be almost a certainty by market participants. All eyes are thus on the movement of short-term and the benchmark 10-year US Treasury over the next couple of days.
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