A tale of two central banks? The Week Ahead from Thomas Watts, abrdn

by | Sep 18, 2023

Thomas Watts, Investment Analyst, abrdn, comments on the economic data releases this week;

“In what could be a tale of two central banks, investor gaze should be fixed on both Wall Street and Threadneedle Street as the US Federal Reserve and the Bank of England are set to announce their base rates for the month. Although the subject will be the same, the trajectories seem to be diverging somewhat, with the tone of both press conferences potentially world’s apart.

“The Federal Reserve are due to go first on Wednesday evening, with the expectation that they will hold rates steady. Although recent economic data has still been fairly robust, it seems this has only served to ease worries over a recession rather than fears that the Fed will have to keep hiking rates. Market futures are now pricing in a 97% chance of the US central bank holding rates steady and a near 65% likelihood of a pause when they reconvene in November. With the chances of rate hike being almost totally ruled out this time around, investors will be listening very carefully for any hints as to what the Fed may do next, ensuring it will be the forward guidance that could really affect markets. 

“In complete contrast, Thursday will see the Bank of England (BoE) almost certainly raise rates by another 0.25%, with all 65 economists polled by news agency, Reuters, expecting borrowing costs to rise to 5.5% from 5.25%. Despite inflation easing to 6.8% in July from 11.1% last October, domestic price rises are the highest among the western world and are forecast to stay above the BoE’s 2% target for years to come yet, suggesting the central bank has far more ground to cover than its central bank peers. Interestingly 30 of those 65 questioned by Reuters expected rates to peak at 5.75% by the end of the year in the UK, with 2 arguing the case for a peak of 6%.

“Despite the two central banks taking the majority of column inches this coming week, there is room for economic data to have some impact, the most notable being a raft of Purchasing Manager Index (PMI) numbers on Friday. Covering both the Services and Manufacturing sectors for the UK, Europe and the US, PMI readings prove so useful to economists due to the data acting as leading indicator of economic health. Businesses usually react quickly to market conditions, with their purchasing managers holding perhaps the most current and relevant insight into the company’s view of the economy.”

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