While the US Federal Reserve goes first to provide an update on Wednesday, odds are high they will pass on this one and simply reiterate that the future path is fully dependent on incoming data. Thursday is the real ‘central bank day’, with nine central banks scheduled to release their updates. The Bank of England, the Swiss National Bank, and the Riksbank in Sweden are amongst the most watched for after the policy halt by the European Central Bank.

Central banks on various missions

We expect the US Federal Reserve to largely ignore the slightly higher inflation reading for August, contributing to the narrative that the policy rates have reached their peaks in this cycle. At the same time, the labour market tightness is easing, even though hard data suggests that the US economy remains well outside recession territory.

In separate monetary policy meetings this week, the Swiss National Bank and the Bank of England are expected to tighten monetary policy once more, while the Bank of Japan has not even begun to tighten its monetary policy yet. Last week’s rate hike by the European Central Bank will most likely pressure the Swiss National Bank to hike its policy again to 2%.

Admittedly, the 1.6% inflation rate in Switzerland is much lower than in other countries and below the price stability threshold of the Swiss National Bank, but we expect the European Central Bank’s rate hike last week to have removed the qualms about another rate hike. The tight monetary policy should counter possible future upside price pressure in an economy that still experiences a tight labour market.

The Bank of England remains under pressure to react to the elevated inflation rate and hike its policy rate despite the latest signs indicating that the economy is slowing. The most recent rise in oil prices contributes to the pressure on both the Swiss National Bank and the Bank of England to hike rates to counter the related inflation pressure. At the same time, we expect the policy rates to have peaked, although admittedly earlier in the US than in Europe. The big outlier remains the Bank of Japan, where we expect some preparations to end its ultra-loose monetary policy.

Signs of stabilising economic momentum in China

Economic activity in China showed tentative signs of a stabilisation in August. In particular, industrial output and retail sales picked up more than expected and credit creation in the economy also came in stronger after the very weak July numbers. The higher credit activity tightened liquidity conditions in the banking sector and led to rising market interest rates.

In reaction, the People’s Bank of China last week cut the reserve requirement ratio for banks by 25 basis points to reduce the amount of money that banks are required to hold as reserves, increasing liquidity in the banking system. This should help drive market rates lower and reduce financial institutions’ funding costs.

In the property sector, activity remained on the weak side in August. Home sales, newly started construction projects, and property investments all remained more than 10% below 2022 levels, while the decline in home prices accelerated. Policymakers have stepped up their support measures for the property sector in the past few weeks by relaxing the definition of first-home buyers in top-tier cities and lowering down-payment ratios and mortgage rates.

Oil cannot be ignored in the long term

The oil market concludes the summer season on a much different note than on the one it started. Oil prices are climbing incrementally, and after passing the USD 90 per barrel mark, they seem to be heading for the triple digits. The market mood flipped from bearish in June to bullish in September, and the sentiment got a boost from different sides. This includes the reduction in recession risks and the prolonged, restrictive petro-nation oil politics under the lead of Saudi Arabia.

The gap between demand and supply might not be as wide as feared, and looking ahead, it is most likely to reverse. Oil demand should almost stagnate going forward for various reasons such as China’s economic challenges, or the swift shift towards electric mobility. Supply should pick up as states such as Iran and Venezuela increase exports and some petro-nations such as the United Arab Emirates get higher output quotas. Robust drilling activity points to continued output growth in North America as well.

What does this mean for investors?

Central banks are in the final innings of their rate tightening, and this may free up capacity for investors to look at new opportunities. The economy is cooling as the rapid monetary policy tightening is starting to bite, and the impact will be more strongly felt later in the year. We expect global growth to stagnate towards early 2024 and advocate that long-term growth may be more worthwhile than cyclical growth.