With the calendar turning to September on Friday, we’re all sitting back and lamenting the end of another summer. Well, for fixed income investors, any possible summer doldrums could quickly change, as a number of potentially headline-making events are looming directly ahead, specifically on the central bank front. While the markets do not appear to be anticipating any surprises, the next few weeks look to be busy.
The fixed income arena had been bracing itself for some potential policy remarks from both Federal Reserve (Fed) Chair Yellen and European Central Bank (ECB) President Draghi at last week’s Kansas City Fed Economic Policy Symposium in Jackson Hole, Wyoming. However, there weren’t any, as both central bank officials essentially kept to the script of their pre-announced topics, financial stability and global trade, respectively. That being said, in a Q&A follow-up, Draghi’s responses did seem to tilt more toward the dovish side.
For the G5 developed market world, the Bank of Canada (BOC) is set to kick things off with its formal policy meeting slated for September 6. After hiking the overnight lending rate by 25 basis points (bps) in July (the first rate hike since 2010), there are no expectations, as of this writing, of a follow-up move. Indeed, the implied probability for a rate hike next week is at 30.1%. It is interesting to note that an integral reason behind the July increase was the BOC’s belief that it needs to focus on future price pressures and not be complacent, even though inflation readings, up to that point, had been on the soft side. Thus, when the July year-over-year inflation gauge jumped up 0.2 percentage points to +1.2%, the policy makers may have felt vindicated. Looking ahead to Q4, the probability of a rate hike for the October policy meeting jumps to 65.8%.
The ECB meets the following day, September 7, while the Bank of England and the Bank of Japan are on the docket for September 14 and 21, respectively. The ECB meeting is likely to garner increased attention, as the market’s focus remains on any potential hint as to when its QE tapering could begin. For the record, no rate increases are priced in through at least September of next year.
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