Week Ahead: Fed and BoJ standout among big risk events

It’s a packed week of major risk events including a very busy central bank meeting schedule. The US Federal Reserve, Bank of Japan, Bank of England, Swiss National Bank, Reserve Bank of Australia, Norges Bank and People’s Bank of China among others, all gather to discuss monetary policy with virtually all likely to leave rates unchanged. But there could be some notable policy action among them, with the BoJ and SNB potentially hiking and cutting rates respectively. The common thread pretty much for all policymakers is inflation, and more specifically, services inflation and wage growth. This will dictate price action in FX and the broader market in the case of the Fed.

Expectations of rate cuts from the Fed have been fuelling the stock market rally and also to some degree, the run-up in gold and bitcoin. We wrote last week how these bets have been yo-yoing, with mounting inflationary pressures seen last week raising more concerns about interest rate reductions. That probably means Chair Powell will reiterate that policymakers remain patient and data dependent while not wanting to pre-commit to any timings of cuts. Signals from the new economic projections and dot plot will be key. It will only take two of six FOMC members changing their mind to move the median dot away from three rate cuts down to two.

The Bank of Japan is a “live” meeting with much speculation that officials could hike rates for the first time in 17 years. With a technical recession in the second half of 2023 revised away, the latest wage negotiations point to a sharp rise in earnings. But consumption, a crucial input into the decision-making process, is still weak and Governor Ueda has stressed data dependency in reaching an appropriate policy decision. The bank also needs to try and communicate that it will take baby-steps with any policy changes to ensure the inflation dynamic remains around 2%. The yen will be volatile with a spread of opinions in the market, while a stronger currency move could be dependent on the Fed shifting to a more dovish bias.

GBP is the only major currency that is currently able to stand tall against the greenback in terms of year-to-date performance. Much of that is to do with the expectation that the Bank of England will not cut rates before August, whereas the Fed and the European Central Bank are seen easing policy in June. Inflation is likely to continue slowly moving lower with the latest print on Wednesday, following softer wage growth, while PMI data points to a mildly improving economic picture in the months ahead. The MPC is unlikely to water down its message that rates will remain high, which should underpin support for the pound.

In Brief: major data releases of the week

19 March 2024, Tuesday

– Bank of Japan Meeting: Markets are divided between a March or April 10bps rate hike. Wages are rising at the highest in more than thirty years. But household consumption remains weak, and Governor Ueda has been cautious about policy changes. 

– RBA Meeting: The RBA is fully expected to keep the cash rate at 4.35%. Inflation is decelerating and labour market conditions are easing. The mildly hawkish bias could be tempered, but rate cuts are still some way off.

20 March 2024, Wednesday

-UK CPI: Consensus sees a reading of 3.6% from 4% in January. Base effects will drive prices lower over the next few months. Headline CPI is likely to cool to around 2% by the third quarter. Services inflation is the key measure for the MPC.

-FOMC Meeting: Focus will be on new, quarterly economic projections and dot plot. Upward revisions are possible in growth and inflation. This could lead to just two rate cuts in the median dot plot for 2024. Powell recently reiterated cautious optimism about the disinflation path and claimed the Fed is “not far” from cutting rates.

21 March 2024, Thursday

–Australia Employment: The job numbers are expected to show a rebound of 30k in February after 0.5k in January. This is mainly due to a softening of labour market conditions, influenced by seasonal shifts. Watch for some of the unemployment details, as these figures might hint at cyclical weakness.

–SNB Meeting: There’s around a one in three chance that the bank cut rates. Inflation has been within the target band for several months and recently cooled to 1.2%. The SNB meets quarterly.

–Flash PMIs: These business activity numbers are released across the globe. The data could confirm the growing view that the global economy is in slightly better shape than feared. The eurozone composite could print above 50, that separates expansion and contraction. The UK composite PMI is forecast to tick up to 53.0 form 52.9.

–Bank of England Meeting: Will we get another three-way vote split? Will Governor Bailey repeat that rates need to stay sufficiently restrictive for an extended period? Markets currently don’t price in a full 25bps cut until August.

22 March 2024, Friday

–Japan CPI / Wage Negotiations: National core inflation is expected to tick up to 2.8% from 2% in January. Meanwhile, Japan’s biggest trade union secured the highest deal since 1991, with a pay increase of 5.3%.

–UK Retail Sales: Expectations are for a m/m decline in February after a 3.4% prior print, which was boosted by a rebound in fuel sales. Elevated prices and restrictive policy remain a headwind.

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