The June 14 Fed rate hike was widely expected. More significant was the Summary of Economic Projections which now indicates a 4-3-1 rate hike trajectory for 2018 to 2020 compared to 3-3-2 at the March FOMC meeting. Core inflation and GDP projections were also upgraded by 0.1% each. The post meeting statement was also more hawkish in content referring to stronger household spending and tighter labour markets. Chairman Powell also signalled intent to hold press conferences following each FOMC meeting instead of every other as is the case currently. Altogether, the statement indicated a stronger US economy and a greater commitment to raising rates at the stated, gradual path.
In China, the PBOC did not follow suit. The PBOC’s objectives and its policy tools are more granular. China’s central bank has been trying to corral credit transmission into more manageable channels. It has increased lending quota’s and cut reserve ratios for the banks while limiting the growth of credit via the shadow banking system. M2 money supply, aggregate financing and new RMB loans all printed below surveys. At the same time, retail sales, industrial production and fixed asset investment all disappointed forecasts. Expect the PBOC to double its efforts to direct credit through the banking system possibly through further RRR cuts.
As widely expected, the BoJ maintained the status quo in all areas of monetary policy at its policy meeting last week. While the BOJ maintained its overall assessment of Japan’s economy, it lowered its current assessment of the annual rate of change in the consumer price index (CPI, all items less fresh food) to “in the range of 0.5%-1.0%”, from “around 1.0%” previously.
The more anticipated central bank meeting was that of the ECB which was expected to give early indications as to policy direction. The ECB did not disappoint. It announced that it would end its 3 year program of QE and cease increasing net purchases by the end of the year. This was a carefully telegraphed move which was widely anticipated. The ECB also signalled that interest rates would likely be on hold until fourth quarter 2019. This was some deft management by the ECB which was in a difficult position given slowing PMIs and inflation as well as political uncertainty in the Eurozone. Signalling an end to QE by year end sent a calming message while pushing out the prospect of rate normalization to Q4 next year provided the doves with some succour. Eurozone sovereign bonds rallied while the euro weakened.
This week, look out for the OPEC + Russia meeting taking place at the end of the week. The world’s largest consumers, including of course the US, have signalled concern at the rising oil price. Russia will want to increase production while OPEC will likely prefer to maintain the supply cuts.
And finally an update on the trade war situation. The US announced last Friday, tariffs on 50 billion dollars worth of China imports. China promptly responded with 25 % tariffs on 545 categories of US products worth 34 billion dollars including soyabeans, beef, whiskey and off-road vehicles. It also threatened to add a further $16bn later, targeting US energy exports such as coal and crude oil. These salvoes would be small in comparison to the potential levies on cars and light trucks which the US is threatening to impose.