Eyes on Fed, BOJ, Europe's bank stress test
EghtesadOnline: Central banks from Washington to Tokyo take center stage next week, although policymakers are likely to remain cautious as they wait for the dust to settle from Britain's shock vote to leave the EU.
As they wait for political reassurances and greater clarity over the likely impact of the move, central banks have mostly avoided action since Britain's June 23 referendum, calming jittery markets with verbal assurances but leaving the burden on governments to chart a path.
G20 finance ministers and central bankers said on Sunday they would work to support growth and better share the benefits of trade, after a two-day meeting in China dominated by the impact of Brexit and fears of rising protectionism, according to Reuters.
The U.S. Federal Reserve is all but certain to keep interest rates on hold on Wednesday, acknowledging improved economic prospects but offering few hints about its next move, keen to avoid repeating its past mistake of stoking rate hike expectations.
The next move is still seen as an increase in rates. But even as concerns over Brexit ease the U.S. election is drawing closer, likely pushing back action towards the end of the year and possibly limiting the Fed to a single hike in 2016, a far cry from its early-year estimate for four moves.
"As the outlook up to mid-September will presumably not be clear enough by then, the next rate hike is more likely to happen in December in our opinion, followed by two further steps in the coming year," Commerzbank said in a note. "Consequently, we predict a somewhat stronger dollar and slightly higher yields in the medium term."
Analysts polled by Reuters also see the next move in the fourth quarter while futures imply a move closer to mid-2017.
Still, the U.S. economy remains on a solid footing with preliminary second-quarter GDP figures due on Friday expected to show the annual growth rate accelerating to a healthy 2.6 percent from 1.1 percent three months earlier.
Economic data have surprised on the upside and financial conditions have also eased recently, suggesting that the U.S. is entering the third quarter on a strong note with solid growth momentum.
For the Bank of Japan, struggling with low inflation, next Friday's rate decision will be a close call with markets simmering with speculation that it will have to ease policy.
It is likely to cut its inflation forecasts, but only slightly, which may allow the bank to justify standing pat for the time being.
Prime Minister Shinzo Abe, fresh off a big election win, is also working on a stimulus package with a headline figure of at least 20 trillion yen ($189 billion), potentially taking some pressure off the BOJ, which was criticized earlier this year for cutting rates into negative territory.
Still, it is uncertain whether the bank can avoid delaying the timeframe for meeting its 2 percent inflation target, suggesting that its rate decision will be a close call.
"Concerns about Brexit fallout on the real economy and financial markets have driven investors to bet on BOJ easing this month," Naomi Muguruma, senior market economist, Mitsubishi UFJ Morgan Stanley Securities said.
"Therefore if the BOJ stands pat this month, that would disappoint the markets, prompting a fall in stock prices and a rise in the yen," Muguruma added.
For now, analysts expect the bank to expand its asset purchases and cut its key rate to -0.2 percent from -0.1 percent.
In Europe, the week's top event will be Friday's release of banking stress test results, with all eyes focused on Italian lenders, seen as the weakest link due to their low profitability and the 360 billion euros ($397 billion) worth of non-performing loans on their books, a legacy of Europe's debt crisis.
Though the test is not a pass-or-fail exercise, the data could give fresh impetus to agreeing on a solution with Italy and the European Commission seemingly deadlocked, disagreeing over state support.
European Central Bank president Mario Draghi hinted on Thursday at the possibility of setting up a public backstop to help Italian banks sell down some of their bad loans that have hampered their ability to lend.
Second-quarter euro zone and British GDP figures will also make for interesting reading, although the number will be seen as less relevant in the wake of the Brexit decision.