Financial markets are showing indications of stress as currencies and interest rates breach crucial levels, forcing policy interventions even in core economies. Although the causes are domestic in nature, they are amplified by a very strong dollar as global capital flows to US assets. This relationship, we feel, is unlikely to change in the near future.
Despite the external consequences from the stronger dollar in recent weeks, the Fed in the United States is expected to maintain its aggressive stance. With updated PCE price estimates suggesting that significant price pressures continuing in August, this week's data will keep the FOMC focused on its price stability mission.
In the eurozone, inflation continues to outperform estimates as activity deteriorates gradually. Some ECB members feel that a recession alone will not decrease inflation, and that policy must become more restrictive. Germany is preparing to relax its fiscal belt, but nations with little budgetary flexibility will be unable to follow suit.
In the United Kingdom, the Bank of England intervened in the gilt market to protect financial stability. We believe the market's expectations for the Bank Rate will be disappointed. With the PM unwilling to back down on tax cuts, the focus remains on the Conservative Party conference and any offsetting cutbacks in public spending.
Credit Suisse's stock has plummeted more than 25% in the last month, and the decline has continued this morning, with the stock down another 9%. Market fears have resulted in a substantial increase in the Bank's credit default swaps, an instrument used to insure corporations against the risk of failure.
Finally, oil prices have risen, with a barrel of crude adding $4 to the price after Opec members and Russia agreed to restrict output. The cartel, led by Saudi Arabia, aims to sustain prices in the face of a likely drop in demand, notably from China, and to retain some supply in reserve in case output from sanctioned Russia falls back.