Week Ahead: Central banks galore but fiscal response is the key

It’s a veritable cornucopia of central bank delights this week with the Federal Reserve, Bank of England and Bank of Japan all in action, following the ECB and Bank of Canada last week. The Bank of Japan decision may well be overshadowed by Japanese politics as the ruling Liberal Democratic Party (LDP) elects a new leader days before the national diet elects a new prime minister.

Meanwhile we continue to keep our eyes on the high frequency economic data, with jobless claims and retail sales numbers on tap as well.

FOMC

The Federal Reserve convenes on September 15th and 16th for the first time since Jerome Powell signalled that the central bank would be prepared to tolerate higher inflation as a trade-off for a swifter economic recovery and jobs growth. Unemployment has fallen since the pandemic peak but is not improving quickly enough.

The Fed is not expected to announce any fresh policy change but will reinforce Powell’s message from Jackson Hole on the policy shift. Indeed the main focus for the Fed right now is actually not monetary policy but fiscal as members await any move in Washington to deliver a fresh stimulus package. 

Bank of England

The Bank of England also meets this week, amid mounting speculation that the Old Lady of Threadneedle St will turn to negative interest rates to stimulate the economy.

Speaking to MPs recently, governor Andrew Bailey refused to rule out negative rates – a policy that has systematically failed to deliver the required inflation in the Eurozone. “It’s in the box of tools,” he said. “We’re not planning it at the moment, we’ve got no plans to use it imminently, but it is in the box.”

Meanwhile, again it is the fiscal response that seems to matter more right now – central banks have already shot most of their ammunition. Andy Haldane, the BoE’s chief economist, warned last week that the UK’s furlough scheme should not be extended – but will the chancellor cave to demands to prolong it in order to protect jobs? As the furlough scheme approaches its end in October, the government may be forced to extend in order to avoid a cliff-edge in job losses. 

Japanese yen in focus

There is a fair chance Japanese equity markets and the yen will see heightened volatility this week with two big risk events. On Monday, the ruling Liberal Democratic Party (LDP) elects a new leader days before the national diet elects a new prime minister.

Following the resignation of Shinzo Abe on health grounds, chief cabinet secretary Yoshihide Suga is the favourite to replace him. Whilst he is the continuity candidate and has pledged to carry on with Abenomics, there is a risk that he may call an election, which could introduce political risk to the JPY and Nikkei 225. The Bank of Japan statement the day after the Diet vote is not anticipated to rock the boat.  

Earnings

On the FTSE, keep an eye out for Ocado Q3 earnings on Tuesday, with investors keen to get a read on how the Marks & Spencer partnership has started. Investors will also want to know the perennial question – where is the cash? Ocado’s share price has rocketed this year on the boom in online retail. Its +80% rally in 2020 puts it behind only Fresnillo in terms of YTD gains.

However, it’s yet to really deliver any returns to investors by way of free profit.

Meanwhile retail bellwether Next (-16% YTD) is a cash cow that even with a collapse in the high street consistently manages to deliver free cash flow. Its half year results follow on Thursday. In July the company reported that while full price sales in the second quarter were down -28% against last year, this was far better than expected and an improvement on the best-case scenario given in the April trading statement. Management guided full year profit before tax at £195m.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.