If it's Monday, it's time for the weekly heads-up...

 

ref:- "Fed watchers on standby for jobs data and "dot plot" ", Market questions in the Financial Times, Companies and Markets

If you wanted to be awkward, you could argue that since this week's "Market Questions" revolves around the murky cocktail of employment levels and inflation, and what it means for monetary policy decisions coming up in the week ahead, it looks a bit like last week's version. You might even say that it looks like any other week's, such is the constant focus on this issue in recent times. And to a degree, it would be true.

But whilst we often say that broadly speaking central bankers in different nations often face very similar problems and can take similar measures to combat them, that's not the same thing as saying their economies are necessarily at the same stage of any cycle and that they will taking the same steps in unison. What's interesting today is the differences in the likely approach of the US, the UK and two Scandinavian nations.

The uninitiated might be tempted to lump the Scandi nations into a single bracket and therefore to assume that their central banks must be adopting roughly similar policy paths. That would be a mistake at any time (there are marked differences in the drivers of the individual economies) and particularly right now. It's generally thought that on Thursday Norway's Norges Bank will be the first of the G10 major currencies group to raise rates since the pandemic struck. In contrast, Sweden's Riksbank is likely to announce tomorrow that not only will they keep rates at zero, but also to confirm their suggestion in July that they would stay there until late 2024 at the earliest. James Pomeroy of HSBC is quoted as saying that whilst there are differences in the implementation of monetary policy across the globe, "nowhere in the world is that divide more evident than (with)in Scandinavia”.

Not unlike the ECB, the Riksbank has got some history of raising rates prematurely only to have to cut them again, something they did in 2011 and would not be keen to repeat. In addition, the strongest element of the central bank's mandate revolves around a 2% inflation target... something they consistently failed to achieve (they were not alone, of course). Notwithstanding the wild, pandemic-influenced fluctuations in prices that may or may not turn out to be transitory, the last thing the Riksbank would want is counter-inflationary rate rises before it was proved that higher levels of price growth are here to stay.

Norges Bank has a broader focus on financial stability rather than an all-consuming focus on inflation, and consequently a more flexible approach. Thus it was quite prepared to raise rates in 2018 and 2019 to rein back a soaring housing market, but also able to quickly bring rates down again from 1.5% to zero when the pandemic hit. Showing the same speed of thought and action, and now that the Norwegian economy is going well again, it is keen to start the process of normalising monetary policy. It's a position that other central banks might envy.

The Bank of England policy committee also meets on Thursday, and the big question is whether last week's (even) higher-than-expected inflation data (highest for almost a decade) will prompt them to make some more hawkish noises. The main point of interest here is that what would constitute a "hawkish noise" would not necessarily be an obviously hawkish statement. If for example BoE Governor Andrew Bailey, who has already appeared less than totally at ease with the assumption that the current inflationary spike is bound to be short-lived, should say that the BoE is comfortable with current market expectations that themselves have become more hawkish, well... that would be like saying "I'm not saying you're right or wrong but I don't feel the need to correct you".

We also have to bear in mind that there will be two new members joining the policy committee who will push the number of those thinking it's time for a light touch on the brakes into a majority should things remain as they are. Don't expect anything as dramatic as changes in rates or policy, but do examine the language for hints that the tightening process will begin sooner than expected. Currently, the market expects rates to rise from 0.1% to 0.25% in May.

And of course there's the US Federal Reserve, whose meeting starts tomorrow before a statement on Wednesday. We've covered the issues here many times, but it boils down to: If the Fed's mandate is aimed at an inflation target of 2% and maximum sustainable employment, the conditions that should require some tightening action by the Fed have been met or exceeded in the case of the former and are heading in the right direction in the case of the latter. But the employment data is volatile, made all the more so by the effects of the Delta variant. August's number disappointed, which will probably stay the Fed's hand this week as far as action is concerned. But most expect the criteria to be met by the time of the November meeting and one should expect Chairman Powell to "open the door" to a November announcement on tapering of asset purchases.

Perhaps of most interest, as it often is, will be the "dot-plot" - the chart of committee members' expectation of rate levels in the future. For the first time this will include prognoses for 2024, and if there is the potential for a surprise it may well be that it will come in the form of more hawkish expectations further down the line, something not yet fully priced into the market.

And finally, whilst we're on the Fed meeting, we would urge you to read "The Fed's Time is Running Out for a Timely Taper", by Mohamed El-Erian in Bloomberg Opinion. Mr El-Erian is always worthwhile, and we had a look at one of his pieces quite recently. He was urging the Fed to act sooner rather than later, just as he does in this article, though he admits he's likely to be disappointed. But if you fancy another explanation as to why prompt Fed action is essential, Mr El-Erian's your man.