We should be in for an exciting week for markets, with three ‘major currency’ central banks announcing their monetary policy decisions and a Nonfarm payroll report. The RBA’s meeting on Tuesday is the most likely to be the live one, but don’t write off the BOJ’s ability of surprising market at Governor Kuroda’s last meeting of his 10-year reign.
And the NFP report could be the cherry on top for the week, given it blew past expectations in January with over a 500k jobs growth print, creating a strong-dollar response and for some members to doubt their own December projections. It will certainly be a report to watch!
The week that was (in a nutshell):
- Money markets priced in a 4% ECB terminal rate
- Fed members continued their hawkish rhetoric, with Kashkari open to a 25 or 50bp March hike (and suggesting the terminal rate could be higher than 5.4%, along with Waller)
- Australian GDP and inflation reports were softer than expected (although CPI remains historically high)
- China’s PMI data was stronger than expected (manufacturing hit a 10+ year high), the Hang Seng enjoyed its second best day this year
- BOE Governor Bailey’s speech suggested the BOE’s next rate decision is finely balanced between a hike and a hold
Market movers:
The week is yet to close with one full trading day left (so expect this to be updated with a market mover chart on Monday) but so far NZD and CAD are the strongest major currencies.
The week ahead (in a nutshell):
Monday
- US: Durables, factory orders
- EU: Retail sales, German construction PMI
- UK: Construction PMI
- Canada: Ivey PMI
- Switzerland: Inflation
- Japan: Foreign reserves, wage income
Tuesday
- US: Wholesale inventories, consumer credit
- EU: Industrial import prices, German factory orders, Spanish industrial prouction
- UK: Halifax house prices
- Australia: RBA cash rate decision, Trade data
- Switzerland: Unemployment
- China: Trade data
Wednesday
- US: ADP nonfarm employment, JOLTS job openings, trade balance
- EU: Europe Q4 GDP, German industrial production and retail sales
- Australia: RBA Governor speaks, RBA chart pack
- New Zealand: a,
- Canada: BOC interest rate decision
- China: Bank lending, current account, Leading index
Thursday
- US: Challenger job cuts
- New Zealand: Retail sales,
- Japan: GDP
- China: CPI, PPI
Friday
- US: Nonfarm payroll
- EU: German CPI
- UK: GDP, construction/manufacturing/industrial output, trade balance
- New Zealand: Business PMI, manufacturing sales
- Canada: Employment report
- Japan: BOJ interest rate decision, household spending, PPI
The week ahead (in detail):
The Reserve Bank of Australia (RBA) are expected to hike by 25bp:
Their overnight cash rate (OCR) is currently 3.35%, and a 25bp on Tuesday would be their 10th consecutive hike (a new record) to take the cash rate to 3.6%. The RBA cash rate futures imply a 75% chance of such an outcome, down from 81% earlier in the week following softer GDP and inflation figures.
The case may have diminished slightly for another 25bp hike, but it remains strong enough to almost take as a given, due to inflation remaining over 7%. So that likely means we need to pour over the statement to look for any clues of a slower pace of tightening or of a pause. The odds of a smaller hike or actual pause strike me as slim. But it is such unexpected events that trigger the higher levels of volatility.
Bank of Canada (BOC) meeting – to pause or not to pause?
The BOC’s OCR is currently 4.5% after slowing their pace of tightening to 25bp in December (from 50bp increments previous, and even a 74bp and 100bp before that). And in all likelihood, they are going to hold rates at a 15-year high on Wednesday.
Their January statement suggested that to be the case, should data remain in line with their own forecasts:
“If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases”. BOJ statement, January 25th 2023
Considering that inflation and GDP data have since softened, the case for a pause has likely grown.
Will Kuroda’s last BOJ meeting be lively or dull?
The BOJ love to surprise, as we saw in January when they announced a wider YCC band unannounced outside of a scheduled meeting. That triggered panic in the bond markets and a much stronger yen, along with high (and ultimately fruitless) hopes that the BOJ would further widen or completely abandon their YCC control all together in their January meeting – on the assumption that Kuroda would want to wrap up his policies before handing over to his successor on April. Needless to say, the surprise was that there was no surprise or change in policy at their January meeting.
So that leaves the BOJ’s Friday 10th March meeting as his last chance to change policy before handing over the reign to his successor, Kazuo Ueda. But given that Kazuo Ueda’s confirmation hearing in February was as dovish as ever, we will not hold our breath for any sudden change by Kuroda’s BOJ on Friday. But if we’ve learned anything from the BOJ over the years, it is to expect the unexpected. So be on guard for volatility irrespective of your own expectations, because then the worst case scenario is that nothing moves.
Nonfarm payroll (NFP):
Next Friday’s NFP report will be highly anticipated, due to the unexpectedly punchy numbers it provided last month. In fact, job growth was so strong at over 500k that the report did a better job of convincing markets how hawkish the Fed needed to be, than the Fed members could do after the latest FOMC meeting.
Overnight, FOMC voting member Christopher Waller said that employment and inflation data for January had challenged his view that the Fed were making significant progress on inflation. He also said that rates may need to rise above 5.4% if incoming data does not pullback from January’s highs.
In a nutshell, another strong employment report justifies a higher terminal rate, likely increases odds of a 50bp March hike, and could send US yields and the dollar higher and weigh on Wall Street.
— Written by Matt Simpson
