Monday: No major events scheduled
Tuesday: UK CPI, RBA Minutes
Wednesday: FOMC Rate Decision, UK Labour Market data
Thursday: RBNZ Rate Decision, BoE Rate Decision, EU Summit
Friday: Japan CPI, EU Summit
The Fed rate decision on Wednesday will be the main focus in North America during the week. A March hike to 1.50-1.75% is almost certainly a done deal – money markets price in a 25bps rate rise with over 90% certainty – so markets will be watching the rate path trajectory and comments from Jerome Powell in his first post-decision press conference. Interest will be placed on how many hikes the FOMC projects in 2018 (currently three), and over its forecast horizon (seven through the end of 2020, to between 3.00-3.25%, while the long-run rate is seen between 2.75-3.00%). For what it’s worth, money markets price three hikes in 2018, and barely five over the forecast horizon.
Recent Fedspeak has raised hopes of an upward revision to the rate path; US President Trump’s fiscal stimulus plan, as well as other nascent signs of inflation (wage growth has firmed, headline CPI is above 2.0%, though both core CPI and core PCE lag, PPI hints at inflation pressures in the pipeline) has seen dovish members of the Committee like Brainard and Bostic (both voters) talk-up a higher trajectory, while centrist Dudley said four rate rises this year is consistent with a gradual pace of normalisation. Even so, UBS argues that this may just be the doves playing catch-up – the hawks always saw 3+ hikes – and, accordingly, there is a risk that the dots could be narrowed at the lower-end of the spectrum, and the median remains three for 2018. Chair Powell himself struck a balanced tone at his recent dual-testimony to lawmakers; while he retained the optionality of four hikes, he noted that “we” (implying the Committee) are not currently seeing strong evidence for a decisive move higher in wages. This was corroborated by the latest earnings data in the Employment Situation Report, which saw the YY rate of wage growth ease back. Other uncertainties – like the impact of any trade wars – may also keep the Fed cautious.
The event calendar has a number of big market-moving events for UK in the coming week: inflation data, labour market data, BoE rate decision and the EU Summit.
Starting with the inflation data, CPI is expected to moderate to 2.8% from 3.0% with the core measure slowing to 3.5% from 2.7%. A reading of 2.8% would be below the Bank of England’s forecast of 2.9% Y/Y from their February Quarterly Inflation Report. The impact of the weaker GBP should slowly start to dissipate, and ING expect core CPI to be virtually back at target by the end of the summer.
The main data release for policy makers will likely come in the labour market data where focus will be on wages for any signs of inflation in the pipeline. “It looks as though the overall tightness in the jobs market is putting pressure on firms to lift pay,” writes ING, “although it’s also worth remembering that the year-on-year numbers are currently being flattered by the particularly weak wage figures at the same time last year.” Expectations are for earnings growth to have risen to 2.6% Y/Y in the three months to January, from 2.5% last month. Employment is expected to increase again but at a slightly slower rate than the 88K last time out. Nevertheless, the data is still not expected to be enough for the Bank of England to hike rates at the meeting on Thursday.
All 65 analysts surveyed by Reuters expect the Bank of England to keep the interest rate unchanged at 0.50% with focus on the minutes and the vote split. There have been no major surprises since the last meeting but if the BoE wants to prepare markets for a potential rate hike in May, then it could see one or two members vote for a rate hike at this meeting. The likely candidates are McCafferty and Saunders, two members who have both been advocates for higher rates in the past. Markets are currently pricing in around an 80% chance of a rate hike in May so any votes for rate hikes this time round should cement that view. One of the key conditions for a hike in May would be the agreement of a transition deal between the UK and EU. “If a transition deal is secured, it would leave the door open for the BoE to raise rates again in May,” said MUFG Macro Strategist Halpenny.
The meeting of the EU Council on Thursday and Friday has been a key date pencilled in by the UK to agree certain Brexit terms, including a transition period. An agreement on a transition period would smooth the process for when the UK leaves the EU and give businesses in the UK some piece of mind over the future trading relationship while details get thrashed out between the UK and EU. Nevertheless, Citi are still relatively cautious: “Even if there is some progress at the summit, nothing is resolved until everything is resolved,” Citi said in a note. “A positive outcome next week would be negotiations moving on to future trade.”
The RBNZ decision on Thursday (Wednesday evening UK) is the main central bank in the Asia-Pac region. The consensus sees an unchanged 1.75%, and money markets do not price a full hike until the middle of 2019, according to Westpac. The central bank is also likely to maintain its forward guidance given that there has been little to alter the landscape since its last meeting, from a data perspective: Q4 GDP rose by 0.6%, a shade below the 0.7% the central bank has forecast and the 0.8% expected. The January labour market data was seen by the RBNZ at its previous meeting (falling to 4.5%) and is now under the central bank’s estimate of NAIRU (4.7% in Q3). With new Governor Orr taking the helm on 27/March – expected to employ a new Policy Targets Agreement which will put the labour market in the RBNZ’s policy considerations, specifically NAIRU – there could be a case for tighter policy in the months ahead. However, this week, it is likely to be a ho hum event, particularly so given the looming threat of global trade wars.
Across the Tasman, on Thursday, the Australian Bureau of Statistics releases their labour market data. The labour force data is again expected to be strong with the unemployment rate holding at 5.5%. “The fundamentals remain sound; and leading indicators, in particular the profits and employment readings from the business surveys, suggest ongoing jobs growth,” writes ANZ. “We look for a rise of 20,000.”
The RBA also release minutes from their March 6th meeting where they kept interest rates unchanged at 1.50%, in line with consensus. The minutes should echo the statement which showed the board were confident that inflation will move to within the target range. RBC says a firmly neutral bias is likely to remain intact.
On Friday, Japan release CPI data for the month of February. The Tokyo CPI reading, which is no longer released at the same time as this reading, showed CPI rising 1.4% Y/Y in February. Therefore, the national data for February is expected to increase to 1.5% from 1.4% in January, the highest since 2014 when allowing for the impact of the sales tax hike. As always, the core measures will be closely followed, and they are also expected to tick higher, ex fresh food and energy from 0.4% to 0.5% and ex fresh food from 0.9% to 1.0%. “Energy inflation should have been little changed last month as the continued moderation in prices of electricity and gas should have been offset by a pick-up in gasoline inflation,” writes Capital Economics. “Finally, a jump in hotel charges and package tour prices should have lifted inflation excluding fresh and energy.”