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Get Ready to Rumble – Central Bank Week is Here

In focus today

In the euro area, we will keep an eye on the final inflation data for February. The final HICP figures provide insights into the underlying inflation measures tracked by the ECB, while also revealing drivers behind the relatively strong core inflation print in February.

Overnight, the Bank of Japan concludes a two-day policy meeting, where analysts’ expectations are very divided. The strong first wage tally (for more details see below) from the “spring wage offensive” we got on Friday was a key missing piece of the puzzle for the BoJ to confidently hike the policy rate out of negative territory. However, the impact on the SME segment remains uncertain. With the continued strong US inflation pressure and postponed rate cuts from the Fed, we deem a hawkish hold from the BoJ most likely. We aim for April as the right timing for a hike and abolishment of the yield curve control – for more details, see Research Japan – BoJ hike in sight – but no reason to rush Japan, 15 March.

In Australia, the Reserve Bank of Australia (RBA) will have a monetary policy meeting early tomorrow morning. In line with markets and consensus, we expect no monetary policy changes.

For the remainder of the week, major central bank decisions will be in focus. On Wednesday, we expect the FOMC to make no monetary policies changes. Thursday we will have Norges Bank (NB), Bank of England (BoE) and SNB decisions. While we expect NB and BoE to keep their policies unchanged, we expect the SNB to deliver a 25bp cut. Additionally, PMI data for various countries, including the UK, US, and euro area, will be released on Thursday.

Economic and market news

What happened overnight

In China, data overnight was slightly to the strong side with especially industrial production (IP) surprising to the upside. IP growth rose from 6.8% y/y in December to 7.0% y/y in Jan/Feb (cons: 5.3% y/y). Retail sales was broadly in line with expectations at 5.5% y/y in Jan/Feb vs expected 5.6% y/y by consensus. Housing data was positive as the level of home sales increased in Jan/Feb compared to Nov/Dec and construction starts also improved. It provides a little light in the housing crisis that the latest stimulus is starting to work and we may have seen the bottom in sales and construction. However, activity levels are still very low, and we need to see more data to make a firm conclusion on this. The market reaction was slightly positive with an 0.5% rise in offshore stocks and a small decline in USD/CNY. Financial markets have shown rising hopes that the worst of the Chinese crisis is behind us as Chinese stocks have rallied decently over the past two months and copper prices are at the highest level since April last year.

What happened on Friday and during the weekend

In the US, the University of Michigan flash consumer sentiment indicator for March was unchanged, whereas the expectations component ticked somewhat lower. While we recently have seen modest upticks in short-term market-based inflation expectations and in the NY Fed’s survey, the University of Michigan inflation expectations, conversely, stayed put at previous modest levels (1y 3.9%, 5y 2.9%). This is good news for the Fed as higher inflation expectations would push real rates lower, and thus cause monetary policy to turn less restrictive. In addition, February industrial production was 0.1% m/m SA, slightly above consensus.

In Japan, as mentioned earlier, Rengo, the biggest labour union federation, released its first wage tally, which revealed a 5.28% wage increase for workers at major firms, close to their demanded 5.85%. The second tally is due this Friday. However, we will have to wait for at least the third wage tally, released in early April, to know more about the 70% of Japanese workers who are employed in the SME segment.

In Russia, the presidential election was held, and President Putin won a new six-year term.

Equities: Global equities were lower on Friday and down for the week. Normally, we would start by spending some time digesting the rotation in equities, but bond markets were more important last week; 5 out of 5 days with higher yields at the short end of the curve driven primarily by too hot inflation prints. With 20 basis points higher across the curve for the “wrong reasons” it is surprising that equities did not lose more last week. Looking forward, the biggest near-term threat to equities is more hot inflation data from the US and higher yields. Looking at the equity rotation, it is not so surprising to see energy and materials sectors doing strong with the inflationary pressure picking up. In the US on Friday, Dow -0.5%, S&P 500 -0.7%, Nasdaq -1.0% and Russell 2000 +0.4%. Asia is mostly higher this morning led by Japan (+2.5%) ahead of the interesting BoJ meeting tomorrow. European and US futures are higher this morning as well.

FI: It was a rather uneventful trading session on Friday with European bonds trading in a very tight range. 10y German yields traded within 3bp from high to low and ended the day at 2.44%. Similarly, the Bund asset swap spreads were virtually unchanged at 30bp. Seen over the week, Bund yields ended 18bp higher, and the Bund ASW tightened 3bp. We expect the Bund ASW to break through 30bp in the near term, as the current drivers (supply, lack of QE, collateral scarcity, and risk aversion) will continue.

FX: Relative monetary policy will likely drive FX markets the coming week with big central bank decisions looming. We do not expect BoJ to hike tomorrow, but it is a close call and if we are wrong JPY would likely head higher. On Thursday, we think CHF is poised to drop if we are right that the SNB will cut rates. The USD will look to see if the Fed agrees with the recent rise in US interest rates.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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