Hawkish market surprises from Norges Bank and Bank of England

In focus today

In the euro area September consumer confidence is due for release. Consumer confidence has been on an upward trend but remains below the historical average and consumer spending is weak. As real incomes are rising and the labour market remains strong, we expect confidence to keep improving, which should support consumption especially next year.

Economic and market news

What happened overnight

In Japan, the Bank of Japan (BoJ) kept its uncollateralized overnight call rate unchanged at 0.25% this morning. In its assessment of the economy, it sounds more upbeat on particularly private spending, which is key for the potential for further rate hikes. BoJ on hold was widely expected and the market reaction is muted.

We got fresh inflation data overnight as well, which showed price pressures picking up and core inflation increasing from 1.6 to 1.7% in August. Broadly, the BoJ will be satisfied with recent developments in the economy and financial markets. Particularly the recent tailwind to JPY makes hiking rates much less acute. With a leadership election within the ruling party (LDP) around the corner, potentially followed by a snap general election, we expect the BoJ will be most comfortable keeping policies unchanged in October as well. The window is open for another rate hike in December, which is our expectation, but much will depend on US data and the Fed cutting cycle. If US labour market cooling intensifies, a JPY rally could pull the breaks on further BoJ hikes.

What happened yesterday

In Norway, Norges Bank left policy rates unchanged including the sight deposit rate at 4.50%. While this was widely expected there were diverging views as to the forward guidance signals on the monetary policy outlook. In short, Norges Bank delivered a hawkish surprise compared with market expectations by pushing back against a rate cut this year. We leave unchanged our forecast for the sight deposit rate and still pencil in the first rate cut in March, and a total of four rate cuts in both 2025 and 2026. 

In the UK, the Bank of England (BoE) left the Bank Rate unchanged at 5.00% as widely expected. The bank delivered a hawkish twist to its guidance emphasising their gradual approach to reducing the restrictiveness of monetary policy. We expect the BoE to deliver the next 25bp cut in November and this to be the final cut this year, making it less than markets expect (42bp by YE 2024). 2Y Gilt yields moved higher on the statement but overall, the reaction in rates markets was muted. EUR/GBP moved lower on the announcement following the slightly hawkish vote split and notion of a gradual cutting cycle. See Bank of England Review - Gradual easing cycle supports GBP, 19 September.

In the euro area, ECB comments were split with both dovish and hawkish tones. Schnabel repeated the view of sticky services inflation, while Centeno said that 'we have really to minimize the risk of undershooting, because that's the main risk'. Panetta said that ECB may accelerate rate cuts in the coming months.

In Turkey, the Central Bank of Turkey left the policy rate unchanged as expected and dropped a reference to potential further policy tightening. However, we think the policy rate will be kept at the current level at least for the remainder of this year, and the cutting cycle to kick off only in Q1 next year.

Equities: Global equities were higher yesterday, buoyed by the optimism resulting from the Federal Reserve's 50 basis point cut on Wednesday. Despite the overall market surge, it was a very cyclical-led market, with utilities and consumer staples even closing lower despite the increased risk appetite. Additionally, minimum volatility stocks underperformed while small caps fared well. Much of the equity market's outlook hinges on the US labour market, making the 219K initial jobless claims print a timely boost for risk appetite. In the US yesterday, the indices closed as follows: Dow +1.3%, S&P 500 +1.7%, Nasdaq +2.5%, Russell 2000 +2.1%. This morning, Asian markets are mostly higher, with Japan leading the gains despite a stronger yen following the Bank of Japan's decision to leave policy unchanged. European and US futures are lower this morning.

FI: Following Wednesday's FOMC meeting decision, European yields pivoted around the 10y point yesterday. The 10y point was virtually unchanged across European jurisdictions with the long end sell-off of about 4bp and the short end rallying about the same, thus leading to a noteworthy steepening across the curves. The 2s10s German bond yield curve is just 2bp inverted now. ECB is priced at 38bp of rate cuts and 117bp currently, which is 2bp more than Wednesday's close.

FX: The USD broadly weakened against G10 in yesterday's session, pushing EUR/USD above 1.1150. USD/JPY declined slightly this morning following the BoJ's expected hold, accompanied by a hawkish statement. A hawkish hold from Norges Bank combined with generally positive risk sentiment led the NOK to outperform among G10 currencies yesterday, with EUR/NOK just above 11.70. The Fed's 50bp cut has fuelled some repricing of expectations for the Riksbank next week. EUR/GBP broke below the 0.84 mark during yesterday's session following a hawkish twist delivered by the Bank of England. Oil prices have recovered to near USD 75/bbl this week.