Financial markets show signs of stress, as currencies and rates break critical thresholds and force policy interventions even in core markets. Although the triggers are domestic, they are magnified by a very strong dollar, as global capital flows towards US assets. We believe this dynamic is unlikely to change in the short term.
In the US, the Fed is likely to stay on its hawkish course, despite the external fallout from the strengthening dollar in recent weeks. This week’s data will keep the FOMC focused on its price stability mandate, with revised PCE price estimates showing that robust price pressures continued in August.
In the euro area, inflation continues to beat forecasts while activity deteriorates incrementally. Some ECB members argue that recession alone will not slow prices, and policy may need to turn restrictive. Germany is set to loosen its fiscal belt, but countries with limited fiscal space cannot follow suit.
In the UK, the Bank of England intervened in the gilt market to ward off financial stability risks. We think market expectations for Bank Rate will be disappointed. Focus continues to be on the Conservative Party conference and, with the PM refusing to back down on tax cuts, any offsetting reductions in public spending.
In Japan, we believe the effects of intervention will prove limited and that the Bank of Japan has few means to address the trilemma of international finance, leaving exchange rates exposed to volatility.
In China, we think the September PMIs suggest that growth is being held back by a lacklustre recovery in services/consumption and weakening external demand, with infrastructure investment acting as an offset. While some incremental easing can’t be ruled out, we don’t expect a big stimulus before the Central Economic Work Conference.
In Emerging Asia, India and Thailand increased rates and signaled their data dependency going forward. We continue to expect Singapore to re-centre up and steepen its SGD NEER policy band in October.
In Emerging EMEA, central banks are front-loading their tightening cycle and most are at or close to terminal rates, in our view. Hungary delivered one large 125 basis point hike, to 13.0%, instead of two smaller hikes. Sub-Saharan Africa central banks have been hawkish too.
In Latin America, Brazil’s presidential elections are the highlight of the region this week, with some polls suggesting a narrow possibility of a first-round win by Lula on Sunday. These elections are not as binary in nature as in previous cycles, partly because both candidates would face similar short-term fiscal and political challenges.
Get the latest report
Authorised clients of Barclays Corporate and Investment Bank can log in to read the latest Global Economics Weekly on Barclays Live: