Three major central banks (Fed, BOJ and BOE) are set to meet this week with each likely to take a divergent path. The Fed decision has already been heavily discussed and the rates space have also priced accordingly. There is about 4% chance of a cut in July and about 2.7 cuts priced by the end of the year. With these odds, we think that the market may have already front ran an expected dovish cue at this week’s FOMC meeting. In the absence of a crisis, calibrated cuts are the still most likely outcome. However, the market has also factored in the possibility that the Fed will opt to cut at a faster pace (but shorter timeframe) to move policy settings closer to neutral.
Meanwhile, speculation is rife that the BOJ may embark on twin tightening (cutting bond purchases by half while also hiking the policy rate). We think that the bond buying reduction (from JPY 6trn per month to JPY 3trn per month over an unspecified period) is already widely anticipated and reflected in long-end JPY rates. However, the BOJ has consistently outdoved market pricing in this cycle. With the JPY strengthening over the past few trading sessions amidst a fall in UST yields, it can be argued that there is less pressure to act. In any case, the market is pricing in 66% chance of a 10bps hike at this meeting and just over two hikes by the end of the year.
Lastly, the market is split on the BOE. There is a case to be made for easing with UK’s CPI already at 2% YoY in June. However, with the unemployment rate still relatively low (4.2%) and services inflation still sticky, there are concerns of the sustainability of recent inflation prints. The market is pricing in 58% chance of a cut at this week’s meeting and about two cuts by the end of the year, a less aggressive pace than the Fed, despite having inflation prints. Overall, we see the Fed and BOE as likely to embark on calibrated easing (although timing may differ) later this year.
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