Frankfurt: European Central Bank policy makers discussing this week how to set monetary policy for their disease-stricken economy will do so very much in the shadow of their US counterparts.
Officials led by President Christine Lagarde are being forced to confront not only the euro’s strengthening to a two-year high, but also whether a driving force behind that move - a shift in strategy by the Federal Reserve to periodically tolerate faster inflation - is one they need to follow too.
The impact of the US central bank’s actions on the ECB’s agenda shows how the euro zone’s monetary authority finds itself momentarily on the back foot as governors reconvene by video after an emphatic summer break.
The ECB’s own review of monetary policy strategy, begun earlier this year in an echo of the Fed’s efforts, was on pause as officials focused on fighting the coronavirus crisis. The US central bank’s verdict is now likely to provide an impetus energizing efforts in Frankfurt to think harder about their approach.
In the meantime, events in the US are likely to keep focusing the ECB in the weeks ahead - with just two months to go before elections there.
“Lagarde struck a tone of cautious optimism in July at her last press conference. At the gathering on Sept. 10, she will have even more reason for caution - signs have emerged that the euro area’s recovery has slowed, virus cases are on the rise and inflation has decelerated sharply,” David Powell and Maeva Cousin, economists at Bloomberg.
Elsewhere, central banks in Canada, Malaysia and Peru also take rate decisions and gross domestic product readings in Japan, the U.K. and Russia provide the latest snapshots of their economies.
US and Canada
In the U.S., markets are closed on Monday for the Labor Day holiday and the Fed is in blackout before its next meeting Sept. 15-16. As for economic data, investors will be watching the latest reading of weekly jobless claims on Thursday - to gauge the strength of the labor market after the August payrolls report - and for CPI for any insights on prices.
In Canada, the central bank will probably brush off signs of a stronger-than-expected rebound on Wednesday, keeping to its narrative the recovery will be long and bumpy and will need to be supported by monetary policy. Governor Tiff Macklem in July pledged to keep rates at 0.25% for at least two more years, something he’s likely to reiterate this week.
China releases trade data Monday that’s expected to show the export recovery continued in August, while inflation data on Wednesday will likely reveal price pressures moderated and industrial deflation eased last month.
Japan revises GDP on Tuesday with a slightly larger record contraction now expected following weaker capital-spending data. Investors will also be keeping an eye on developments in the leadership race there, though Shinzo Abe’s right-hand man, Yoshihide Suga, appears firmly established as the front-runner.
Malaysia’s central bank meets Thursday to decide on interest rates.