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Week Ahead – Fed expected to raise rates, but BoJ, BoE to hold fire 11/03/2017 by XM

With a number of central bank meetings lined up next week, the US Federal Reserve is the only one that’s expected to make a move. Central bank meetings in Japan, Norway, Switzerland and the UK may end up being a non-event as all eyes will be on the FOMC’s updated rate projections. The US will also dominate in terms of data as inflation and retail sales numbers are due to be published.

 

Bank of Japan to stand still as further easing expectations diminish

Japanese data will start the week on Monday with the latest machinery orders. Core machinery orders – a closely watched indicator of capital spending in Japan – are expected to rise by 0.5% month-on-month in January. Capital expenditure grew at the fastest rate in three years at the end of 2016 as the improving global economy and a weaker yen boosted demand for Japanese goods. A positive figure next week would add to the growing expectation that the Bank of Japan, which meets on March 15-16, is done with easing and the next move will be to tighten. The BoJ will announce its decision on Thursday and will likely keep its policy rate at -0.1% and its yield curve target at around 0%. However, BoJ Governor, Haruhiko Kuroda, is not expected to deviate much from an easing bias when he speaks at the press conference, as the Bank would be wary of creating upside pressure on the yen, as well as being uneasy about the potential risk of the US adopting protectionist trade practices.

 

Eurozone inflation to be confirmed at 2%

Headline inflation across the euro area is expected to be confirmed at 2% year-on-year in February’s final reading on Thursday. This week, the European Central Bank appeared not too fussed by the apparent miss of its target of close but below 2%. With underlying inflation forecast to remain unchanged at 0.9% in February, the ECB wants to see more evidence of a sustained upward trend. With the broader economic picture in the Eurozone continuing to improve, an acceleration in underlying inflation may just be on the horizon.

Other data out of the Eurozone next week are forecast to reinforce the optimistic outlook. Industrial production figures released on Tuesday are expected to show output growing by 1.3% m/m in January, up from a 1.6% drop the prior month. The ZEW economic sentiment index out of Germany, also on Tuesday, is forecast to rise too in March.

Possibly casting a shadow though over the region’s rosier outlook are key European elections, the first of which will be held on Wednesday in the Netherlands. The Dutch far-right party, PVV is expected to win the most seats but not enough for a majority. It may struggle to find allies from other parties so it’s possible it might not even be able to form a government. However, markets might still be unsettled if there appears to be an overall large swing towards populist parties.

 

Aussie and kiwi look to data for support after commodities sell-off

The Australian and New Zealand dollars tumbled to multi-week lows this week as commodity prices took a hit from the stronger US dollar. Both currencies may find some relief if New Zealand GDP and Australian jobs figures meet expectations on Wednesday and Thursday respectively. New Zealand’s economy is forecast to grow by 0.7% quarter-on-quarter in the final three months of 2016. This is slower than the third quarter’s 1.1% rate but still one of the highest among advanced economies. In Australia meanwhile, the economy is expected to add 16k jobs in February, compared to 13.5k in January. What will be more closely scrutinized though is the number of full-time jobs within the total figure as this is generally seen as a better indicator of the health of the labour market, as well as being key to generating wage pressures.

 

Bank of England unlikely to raise inflation alarm while economy slows

The Bank of England will announce on Thursday its latest policy decision, but with signs that British consumer spending is waning, it is not expected to see the recent spike in headline inflation as a major risk. Having only updated its economic forecasts last month, the Bank will likely stick to the view that it is willing to tolerate some overshoot of inflation above its 2% target as the economy transitions to a post-Brexit environment. UK interest rates currently stand at a record low of 0.25% and most analysts don’t see any change for the rest of the year.

Unemployment figures out on Wednesday will also be important as the Bank keeps a close eye on wage pressures. The UK jobless rate as per the ILO measure is forecast to stay unchanged at 4.8% in the three months to January, while total average earnings are expected to slow slightly from 2.6% to 2.4% y/y. Slowing wage growth may pose a problem for policymakers as it would deter shoppers from spending more when consumer prices are on the up, and with domestic consumption being the main driver of UK growth, this would lead to weaker GDP growth.

Traders should also be on standby next week for the possibility that the UK government may trigger Article 50 at some point during the next seven days. While there would be no immediate change to the UK’s relationship with the EU after Article 50 had been invoked, the event could still send the pound into another free fall.

 

Fed dot plot in focus

A rate hike by the Fed on March 15 has been almost fully priced in now with the CME Group’s FedWatch tool predicting a 93% probability of a 25bps increase in the federal funds rate to a range of 0.75-1.00%. The dollar’s reaction will therefore be dependent on what the FOMC will signal about the pace of future hikes. In December, the Fed projected three rate hikes in 2017. A median forecast of four rate hikes in 2017 in March’s dot plot chart could be enough to refuel the dollar rally, as well as more hawkish remarks by Fed Chair Janet Yellen in her press conference on Wednesday.

Key US data should also be watched next week, starting with the inflation and retails sales numbers to be released hours before the FOMC announcement. Annual CPI is expected to edge up to 2.7% in February from 2.5%, but core inflation is estimated to ease slightly to 2.2%. Retail sales are also forecast to slow in February following very strong growth in recent months. Headline retail sales are expected to come in at just 0.1% m/m. On Thursday, housing starts and building permits are due, as well as the Philly Fed manufacturing index and the JOLTS job openings. On Friday, the preliminary reading of the University of Michigan’s consumer sentiment index for March and industrial output numbers for February will round up the week.

 

SNB and Norges Bank to stand pat

Vying for attention next week will be policy meetings by the Swiss National Bank and Norges Bank (both on Thursday). Neither central bank is expected to announce a change in policy but their statements will be monitored for their next possible move. SNB Chairman Thomas Jordan recently repeated that the Swiss franc remains “significantly undervalued” and sounded concerned about the political risks from the European elections and Brexit, as the regional uncertainty is generating safe-haven demand for the franc. The SNB may signal future easing of policy if it judges that its currency intervention alone is not sufficient enough to maintain downside pressure on the franc.

The Norges Bank may also sound dovish, especially after much weaker-than-expected core inflation figures out of Norway this week, though for now, the Bank is expected to hold rates at 0.5%.

 

Sourcewww.xm.com

 

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