Monday: No major events
Tuesday: Norway CPI
Wednesday: China CPI, Fed minutes, US CPI, Sweden CPI
Thursday: ECB Minutes
Friday: China Trade Balance
The Fed releases minutes from their March meeting on Wednesday at 1900GMT/1400EDT. Back at that meeting, the central bank hiked rates by 25bps to 1.50%-1.75% but the median view still only saw three rate hikes in 2018, rather than the four some were predicting. There was enough in the statement and press conference for the hawks and doves to get their teeth into as the neutral rate was lifted marginally but Powell dampened expectations of four hikes in 2018 by suggesting wages were not showing big signs of accelerating and that the recent data doesn’t signal that the US economy is on the cusp of faster inflation. Markets may also be looking out for comments in the minutes on market volatility and whether the Fed is concerned about the recent moves in financial markets. “We don’t believe the recent volatility is enough to make the Fed consider its current course,” writes Nordea in a note. “Hence, the flattening of the USD curve can continue.”
US core CPI is expected to have reached 2.0% Y/Y in March for the first time since March 2017. “After a prolonged period of weakness, US core CPI looks set to return to 2.0% as a distortion related to cell phone data pricing drops out of the annual comparison,” says ING. “While this may sound slightly bizarre, a quality adjustment to the CPI basket made in March last year resulted in a sharp one-off drop in communication costs and this has been knocking 0.2-0.3ppts off most core inflation measures ever since.”
In what was a quiet week last week in terms of central bank activity for the region, focus will return to the ECB with the Bank set to unveil their account of March’s monetary policy meeting. To recap, last time round, the ECB dropped their pledge to increase size and/or duration of QE purchases (unanimously) but stated that no discussion had taken place on other policy changes. That said, markets will be looking to see if this statement from President Draghi complies with or opposes the contents of the minutes as has previously sometimes been the case as shown by source reports. That said, if any discussions took place they are likely to have been at a particularly primitive stage given that April’s meeting is expected to provide little in the way of fireworks with a bulk of announcements set to come in June/July before the Bank’s PSPP concludes in September. Furthermore, members of the ECB in recent interviews appear to be on the same page on some aspects of future policy announcements with a phasing out of current purchases and a mid-2019 hike the base case for markets.
From a political view point, European traders will be continuing to keep an eye on the latest (or potential lack of) updates in Italian politics. Last week saw President Mattarella begin consultations with the respective heads of leading parties, during which, it was reported that Italy’s League and 5SM are said to have narrowed policy differences whilst Democratic Party Secretary Martina stated that the party is looking to remain in parliamentary opposition. Nonetheless, not enough progress was deemed to have been made by President Mattarella and as such negotiations will roll over to this week in what was never going to be a straight forward affair.
Elsewhere, focus could also fall on Scandinavia next week with Norwegian and Swedish inflation figures due. Starting off with Norway, consensus looks for a downtick in the headline Y/Y rate from 2.2%. However, Nordea look for “core inflation to jump to 1.7% above the Norges Bank’s view of 1.5%. However, we don’t expect a jump in inflation to be enough to prompt a rate hike from Norges Bank earlier than September.” For Sweden, Y/Y inflation is set to remain at 1.6% for the headline with Nordea opining that “higher energy prices are to lift CPIF inflation to the 2% target in March. Inflation excluding energy is still uncomfortably low, though. In an alternative scenario for the coming year with a continued weak krona, underlying inflation rises to 2%.”
Data from the Asia-Pacific region is light throughout the week so focus could be on China amid fears of a full-blown trade war. On Friday, China threatened to respond to Trump’s threat, saying they will not hesitate to retaliate if they need to. One point that has been mentioned in passing but isn’t widely expected is if China threatened to offload, or stop buying, US government debt. Latest TIC data showed China held USD 1.17tln of US debt in January, making it the largest foreign holder of US paper. DoubleLine’s Gundlach said China could use its holdings as leverage, but only if they still hold them. “If they sell, they have no threat,” the Bond King said. Back in January, there were murmurs that China might halt or slow its purchases of US debt, but they quickly refuted the reports.
So, with trade in focus, China’s trade balance, released on Friday, will be closely watched by market observers. Both exports and imports are expected to increase 10% Y/Y in USD terms, taking the USD trade surplus to USD 27.2bln. “There is always an array of views for post Chinese New Year trade activity,” writes TD Securities. “PMI export and import orders indices dipped, pointing to some weakness in both.”