Investors are poring over the July meeting minutes of the Federal Reserve's rate-setting committee, released last Wednesday. At that meeting, the Fed held its policy rate steady in the 3.5%-3.75% range for the fifth consecutive time, a decision clouded by persistent inflation. Amid the Iran conflict, energy prices remain elevated, pushing inflation above the Fed's 2% target. Investors are particularly keen to glean insights from the minutes on the committee's outlook for prices and what factors might prompt more members to vote for a rate hike.
New Fed Chair Kevin Warsh has abandoned the so-called forward guidance on rates and offered little reasoning for last month's hold, intensifying the market's urgency to decode the minutes. Pooja Kumra, a rates strategist at TD Securities in Canada, said the minutes "should provide a glimpse into the depth of the divergence within the FOMC." She noted that Warsh has repeatedly stated his desire for a "full internal debate" among rate-setters when charting the path ahead.
Fan Lu, head of global solutions strategy at Russell Investments, noted that three FOMC members voted for a rate hike in July. He "is particularly interested in gauging the size of the hawkish camp beyond these three dissenters." Futures market data show traders price only about a 30% probability of a 25-basis-point rate hike at the Fed's September meeting. If the minutes reveal Warsh's "reaction function" under his leadership—how the Fed adjusts policy based on economic data and which inflation metrics it prioritizes—it could shift market views on the likelihood of a hike.
Will Japan's inflation support a September rate hike?
The effect of recent joint US-Japan currency intervention has faded, with the yen sliding back toward multi-decade lows. Investors will focus on Friday's inflation data, seeking evidence on whether it might support the Bank of Japan's case for a rate hike. Economists expect core CPI, which excludes fresh food, to rise 1.8% year-on-year in July, up from 1.6% in June. Swap market pricing suggests a two-thirds probability of a 25-basis-point rate hike at the BOJ's next meeting, following its decision to hold the policy rate at 1% in July.
Stefan Angekic of Moody's Analytics said, "Inflation is almost certain to rise... Higher energy costs are pushing up food prices, and a weaker yen is boosting costs for items like housing and furniture, making this a broad-based inflation uptick." He predicts the index will rise to 2%. Monday's preliminary GDP data is expected to show Japan's economy grew 0.5% quarter-on-quarter in Q2, flat from the previous quarter, with a recovery in consumption adding arguments for a rate hike. Yet Angekic believes the yen's weakness and ongoing pressure could be the decisive factor for the BOJ.
Takeo Hoshi, a professor of economics at the University of Tokyo, said the market already expects a rate hike next month. If CPI inflation holds steady or even rises slightly from recent data, it will likely confirm the BOJ's decision to raise rates.
Will UK inflation rebound?
UK Prime Minister Andy Burnham enjoyed a positive first week in office, with June inflation hitting a 15-month low. But with the Middle East conflict ongoing, economists see this moderation as temporary. A Reuters poll of economists expects official data on Wednesday to show July CPI rising to 2.9% year-on-year, up from 2.6% in June, and still well above the Bank of England's 2% target. Sanjay Raja, chief UK economist at Deutsche Bank, said, "We've had a run of good news on inflation, with June CPI falling to a year low, but we expect a summer rebound in July."
The Bank of England reported last month that it expects inflation to climb to 3.2% by year-end, reflecting the continued pass-through of higher energy costs. The survey shows services inflation, a key core measure closely watched by policymakers, is expected to ease to 3.4% in July from 3.6% in June. But Barclays economists predict services inflation will rebound again in September after the government's summer VAT relief on attractions and children's meals expires. Traders anticipate the BOE's policy rate, currently at 3.75%, will see only one more 25-basis-point hike by year-end. Swap-implied market pricing suggests just a one-in-four probability of that hike occurring in September. A key variable is oil prices, with the Brent crude benchmark remaining elevated at $87 per barrel. Any further rise could test the BOE's tolerance for inflation.
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