How will the Bank of England respond to the return of Brexit risks?
After being overshadowed by Covid-19 for much of the year, Brexit moved back on to investors’ radars last week after the UK government revealed legislation that would override key parts of its EU exit agreement, risking the collapse of trade negotiations with Brussels.
Currency markets reacted swiftly, with the news triggering the steepest weekly fall in sterling against the dollar since March.
Most analysts think the Bank of England’s Monetary Policy Committee will not announce any immediate action to address the heightened risk on Thursday. Nonetheless, investors will be watching carefully for clues on what policymakers will do next.
Jamie Searle, a Citigroup strategist, said a minority on the central bank’s rate-setting committee could vote for more bond-buying this week, “given growing downside risks from Covid-19 and Brexit”, he said.
Brexit uncertainties have also brought forward the expected timing of a cut in interest rates from the current record low of 0.1 per cent. A move to zero by February has now been fully priced into interest rate futures contracts, with a growing chance of a cut into negative territory later in 2021.
At last month’s meeting, BoE governor Andrew Bailey kept his cards close to his chest regarding a cut, only saying that negative rates remained in the central bank’s “toolbox”.
Stefan Koopman, senior market economist at Rabobank, said that with the UK facing a multitude of risks including a surge in virus infections, tightened social distancing rules and a Brexit without a trade agreement, it is “hard to see how this isn’t ultimately met with a monetary policy response”. But BoE action would probably be delayed until November, he added. Tommy Stubbington
How will the Fed’s policy shift on inflation work in practice?
A the end of a two-day meeting of the US central bank’s Federal Open Market Committee on Wednesday, its chairman Jay Powell is certain to be interrogated at its closing press conference about the Fed’s historic shift to setting interest rates unveiled last month.
At Mr Powell’s Jackson Hole announcement, he said the Fed would tolerate higher inflation in an attempt to make up for periods of persistently undershooting its 2 per cent target.
Since then, Fed officials past and present have come out in droves to provide context about the change, but there have been scant details on how the policy would work in practice.
Andrew Hunter, senior US economist at Capital Economics, expects the Fed will provide “only modest changes” to its policy statement and will demur from rolling out new stimulus measures.
But such an approach comes with risks, he thinks. After the Fed appeared to signal a bold new era, policy tweaks around the edges “would come as a big disappointment to markets”, said Mr Hunter. Such an outcome could lead to “Treasuries selling off and the recent slide in the stock market intensifying”, he said. Colby Smith
What will ‘Suganomics’ mean for Japan’s investors?
Investors in Japan will be focused on the successor to Shinzo Abe, the country’s longest-serving prime minister, who is expected to be revealed on Wednesday. In pole position, by a substantial margin, is Yoshihide Suga — a dour politician who has served as chief cabinet secretary to Mr Abe.
The big question for investors, who have spent almost eight years growing attuned to the policies that fell under the broad “Abenomics” umbrella, is whether there is a coherent “Suganomics” strategy about to take over that will bring with it significant new reforms.
In public, Mr Suga has spoken of a continuation of Abenomics, which has generally been welcomed by the market. Some analysts say Mr Suga may try to push harder for change in areas such as digitisation and a shake-up of the health and labour ministry.
The minister has already given investors the sense that he may be bold, suggesting in one interview that he would be open to consolidation of Japan’s large regional banking sector, which would be a historic step.
The frontrunner has also been drawn into the sensitive issue of Japan’s consumption tax, a subject that has historically had a large impact on market sentiment and economic activity.
During a television interview last week, Mr Suga said the fall in Japan’s population meant the government would need to “ask the people’s permission to raise the consumption tax after fully implementing administrative reforms”. If he lands the top job, Mr Suga is likely to be pressed on these remarks. Leo Lewis