Weekly Market Outlook (18-22 March)

UPCOMING EVENTS:

• Monday: China
  Retail Sales and Industrial Production, Canada PPI, US NAHB Housing Market
  Index.
• Tuesday: BoJ
  Policy Decision, RBA Policy Decision, Eurozone Wage data, Eurozone ZEW,
  Canada CPI, US Housing Starts and Building Permits.
• Wednesday: PBoC
  LPR, UK CPI, FOMC Policy Decision, New Zealand GDP.
• Thursday: Australia/Japan/Eurozone/UK/US
  Flash PMIs, Australia Labour Market report, SNB Policy Decision, BoE
  Policy Decision, US Jobless Claims.
• Friday: Japan
  CPI, UK Retail Sales, Canada Retail Sales.

Tuesday

The BoJ is expected to finally exit the
negative interest rate policy (NIRP) raising their policy rate by 10 bps.
Moreover, the central bank is seen ditching yield curve control (YCC) but
keeping QE and discontinue ETF purchases. Such expectations were solidified by
many leaks
and reports and the highest wage
hikes in 30 years. The market has
already priced in the BoJ exit, so there’s a big risk for disappointment.
In fact, we can expect the Yen to selloff hard in case the central bank
refrains from delivering on expectations. On the other hand, the bar for
another round of big Yen gains is pretty high as the BoJ will need to sound
hawkish and signal more to come.

The RBA is expected to keep the Cash Rate
unchanged at 4.35%. Given the recent lower inflation
numbers and another ugly labour
market report, the central bank is
likely to drop the tightening bias and keep a neutral stance. The market is
expecting the first rate cut in August, but I suspect the market will bring
expectations forward in case the RBA drops the tightening bias.

The Canadian CPI Y/Y is expected at 3.1%
vs. 2.9% prior, while the M/M measure is seen at 0.6% vs. 0.0% prior. As
always, the focus will be on the underlying inflation measures as that’s
what the BoC is most concerned about. In the last
report, we saw a miss across the board and it
will certainly be good news for the central bank if it happens again,
especially in light of the easing in wage growth in the recent labour
market report. A miss is likely to weigh on
the Canadian Dollar, while a beat shouldn’t change much for the market.

Wednesday

The PBoC is expected to keep the LPR rates
unchanged. The central bank recently delivered two bigger than expected cuts to
its RRR
rate and the 5-year LPR
rate. Last weekend, the Chinese
Inflation data beat expectations across the
board by a big margin with the Headline Y/Y reading jumping to 1.0% and the
Core Y/Y measure to 1.2%. The PBoC might not feel the urgency to cut rates
further at the moment.

The UK CPI is expected at 3.6% vs. 4.0%
prior, while the M/M measure is seen at 0.7% vs. -0.6% prior. The Core CPI Y/Y
is expected at 4.6% vs. 5.1% prior, while there’s no consensus for the M/M
figure at the time of writing although the prior reading was -0.9%. The
market expects the first rate cut in August and we will likely need a notable
miss, especially for services inflation, to see the pricing shifting towards a
June move.

The Fed is expected to keep interest rates
unchanged at 5.25-5.50%. The focus will be on the economic projections and the
dot plot. It’s unlikely to see major changes as the central bank will want to
keep optionality and not overreact to the recent inflation readings. If the
dot plot shifts from three to two rate cuts this year, that will be likely
taken as a hawkish “surprise” by the market, but Fed Chair Powell could
smooth it down in the Press Conference striking a more neutral message and
saying that it’s all conditional to incoming economic data. On the other hand,
if the dot plot still shows three rate cuts, Powell is likely to sound a bit
more hawkish just to counterbalance the likely dovish reaction from the
unchanged dot plot.

Thursday

Thursday
will be the Flash PMIs day for many major economies, but the market will likely
focus on the US ones:

• Eurozone
  Manufacturing PMI 47.0 vs. 46.5 prior.
• Eurozone
  Services PMI 50.5 vs. 50.2 prior.
• UK
  Manufacturing PMI 47.8 vs. 47.5 prior.
• UK
  Services PMI 54.0 vs. 53.8 prior.
• US
  Manufacturing PMI 51.7 vs. 52.2 prior.
• US
  Services PMI 52.0 vs. 52.3 prior.

The
Australian unemployment rate is expected to tick lower to 4.0% vs. 4.1% prior,
with 30K jobs added in February vs. 0.5K in January. The last report missed
expectations across the board with the unemployment rate continuing to trend
higher steadily. Another ugly report is likely to bring rate cuts
expectations forward while a beat shouldn’t change much at this point.

There’s
basically a 50/50 chance that the SNB cuts interest rates by 25 bps at the
March meeting. The expectations for an earlier move rose after another
downtick in the latest inflation data where the Headline CPI Y/Y eased to
1.2% and the Core CPI Y/Y to 1.1%, both well below the SNB’s projections and
comfortably within the 0-2% inflation target. If the central bank refrains from
cutting at this meeting, it’s very likely that they will signal a move in June
and by then they could even cut by 50 bps.

The
BoE is expected to keep interest rates unchanged at 5.25% with Mann and Haskel
voting for a hike, Dhingra for a cut and the rest for a hold. The economic data
leading into the meeting has been mostly benign with no particular surprises.
The MPC will also see the latest UK inflation figures on the first day of the
meeting, so that could influence the voting split but very unlikely to
change anything else. The market is fully pricing the first rate cut in
August.

The
US Jobless Claims continue to be one of the most important releases every week
as it’s a timelier indicator on the state of the labour market. Initial Claims
keep on hovering around cycle lows, while Continuing Claims remain firm around
cycle highs. There’s no consensus at the time of writing for the claims
figures, but the prior report saw a
beat across the board with huge positive revisions to the Continuing Claims figures
which led to a strong hawkish reaction in the markets. This
is because disinflation to the Fed’s target is more likely with a weakening
labour market. A resilient labour market though will make the achievement of
the target much more difficult.

Friday

The
Japanese Core CPI Y/Y is seen jumping to 2.8% vs. 2.0% prior with no consensus
for the other measures although the prior readings saw the Headline CPI Y/Y at
2.2% and the Core-Core CPI Y/Y at 3.5%. Depending on the BoJ’s forward
guidance at the policy decision, a beat will likely trigger a bigger
reaction with the Yen strengthening across the board.