Key Takeaways
The Federal Reserve (Fed) and Bank of Canada (BoC) have turned more hawkish, but the next steps remain data-dependent. The Fed's hiking cycle likely isn’t over. Softer jobs data argue for an October pause, but with core Personal Consumption Expenditures (PCE) still at 3.0% and the Fed’s most recent Summary of Economic Projections (SEP) signaling another interest-rate hike, a hike of 25 basis points (bps) seems likely in December. For the BoC, the next move is more likely up than down. The BoC should hold in October, but broadening inflation and BoC Governor Tiff Macklem’s warning against being “too slow to respond” keep a hike in play if core inflation firms.
Europe is moving further into tightening territory, albeit at different speeds: The European Central Bank (ECB) has now delivered two hikes, and another move in December looks likely, while the Bank of England (BoE) is being pushed closer to action as inflation risks rise and the growth trade-off becomes less severe. Norges Bank has returned to its previous peak policy rate and may yet hike again, while the Riksbank is moving gradually back toward neutral. The Swiss National Bank (SNB) remains the exception, with higher inflation risks not yet sufficient to warrant a hike.
Asia is firmly on a hiking path: With growth holding up more resiliently despite the Middle-East energy risks, inflation has become a bigger focus for central banks in Asia with the Reserve Bank of India (RBI) finally raising rates and Bank of Korea (BoK) expected to do more. The Bank of Japan’s (BoJ’s) December hike also sits firmly on the table as wages remain resilient and inflation sticky. Both the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) are expected to hike further, despite having tightened already year-to-date. The People’s Bank of China's (PBoC) easing should stay targeted and incremental, not large-scale stimulus. A stronger yuan gives the PBoC more room to cut rates without immediately reigniting depreciation pressure.
The Franklin Templeton Fixed Income (FTFI) Central Bank Watch is a qualitative assessment of the central banks for the Group of Ten (G10) nations plus three additional countries (China, India and South Korea). Each central bank is scored on three parameters: Inflation Outlook Perception, Quantitative Easing/Liquidity Management Programs, and Interest Rate Forward Guidance. Each parameter can be scored from a range with a minimum of –2 (dovish) and a maximum of +2 (hawkish). The methodology for scoring compares the latest monetary policy statement/press statements with prior ones to see how the language and tone regarding each of these parameters may have changed over time. The scores are ultimately aggregated for each central bank, with a final FTFI score ranking each from –6 (for most dovish) to +6 (for most hawkish). We also provide our one-year ahead policy rate expectations and compare our rankings and expectations with market implied policy rates to evaluate the difference between our expectations/rankings and market expectations/rankings.
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WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.