After This Week, Does August Matter?

There are four events this week that will command the attention of global investors.  

1. The Reserve of Bank of Australia is first. It is a close call, though the median in the Bloomberg survey favors a cut, including most of the banks in Australia that participate in the poll. 

The case for it is that price pressures are weakening, and credit growth is slowing. The currency has begun appreciating again, and the Federal Reserve cannot be counted on to lift US rates until the end of the year, at the earliest.   

The argument against the RBA moving is that there is no urgency to exit the “watch and wait” mode. A rate cut would not necessarily weaken the currency as Australia would still offer highest policy rate (after New Zealand) among the high income countries. It is also not clear that the record low interest rates are a constraint on credit growth. Better keep the powder dry and see how events evolve, though it can be fairly confident that New Zealand will cut interest rates later in August.  

2. Investors are more confident of the outcome of the Bank of England’s meeting than the RBA meeting. After the recent dismal survey readings, indicative prices suggest that a 25 bp rate cut is fully discounted. A newswire survey found 95% of the sample anticipated a rate cut, and of those, 95% expect a 25 bp cut in the base rate. 

There are two other measures that the BOE is expected to consider. A little more than 80% of those who expect the BOE to do more than cut rates expect the funding for lending scheme to be extended. Participants are nearly evenly split on the prospects for a new round of asset purchases. About half of those that expect a new round of QE expected it to be between GBP25 and GBP50 bln. Outside of that ranges the response were heavily in favor of a larger than a smaller Gilt buying program.  

Sterling eased to the lower end of a $1.30-$1.35 trading range as the market priced in the easing of monetary policy. It may firm back toward the upper of the range as the soft US dollar environment we anticipate, coupled with “sell rumor, buy fact” type of activity. In the futures market, speculators have a near record short gross sterling position and have a record net short position.  

3. Japan’s Prime Minister Abe seemingly hurriedly confirmed some details of his fiscal plan. If he intended on cajoling the central bank into joining the fiscal stimulus with a large dose of monetary support, it was insufficient. Abe is expected to provide more details of the fiscal package. The cabinet will formally approve it, and it is not clear whether the cabinet will do so before of after it is reshuffled, and the sequence may not matter.