Equity markets were patchy this week as stronger-than-expected US inflation data drove Treasury yields higher and lifted the dollar. The positioning ahead of next week's Fed meeting indicates that markets sense the policy-setting committee may signal fewer rate cuts this year than the 3 currently projected as its central forecast. Outcomes from key wage negotiations in Japan were seen as clearing the runway for the BoJ to exit from negative rates at next week's meeting.
An interesting Fed meeting awaits next week. Economic activity and the labour market remain resilient and there are signs that the disinflationary process is losing momentum. This economic backdrop has led markets to scale back their expectations for Fed rate cuts from as many as 7 at the start of the year to the 3 signalled by the FOMC in their December forecasts. Much of the interest, therefore, is around whether the FOMC retains this forecast for 3 rate cuts this year in light of recent data.
This week, February reports for consumer (CPI) and producer prices (PPI) surprised on the high side of expectations. Headline CPI was 0.4%m/m, rising from 3.1% to 3.2% at an annual pace (vs 3.1% exp). This was the strongest month-on-month rise since September, with an uptick in energy prices (2.3%m/m) being a major contributor. However, the core rate also came in at 0.4%m/m (the same as in January), suggesting this was a more broad-based lift in prices, and the annual pace slowed by less than expected from 3.9% to 3.8%yr (vs 3.7% exp). The main concern for the FOMC is the disparity between goods (0.3%yr) and services inflation (5%yr; there is uncertainty that the former has scope to decline much further while the latter continues to run at a pace too hot to be consistent with a sustainable return to the 2% inflation target.
A slight softening in UK wages data (6.2% to 6.1%yr) and a fall in job vacancies (to 908k) provided signs of easing labour market conditions. Inflation data for February is due out next Wednesday, but the implications for the BoE meeting the following day appear to be limited. Markets aren't expecting the BoE to cut rates until the second half of the year, with policymakers signalling that restrictive monetary policy will be required "for an extended period". The ECB's operational review appeared not to contain any major surprises as far as markets were concerned. The review looked into the tools and strategies the ECB will call upon to implement monetary policy going forward. In the short term, there are few implications by all reports, mainly because the deposit facility rate was reaffirmed as the main policy rate of the ECB's 3 interest rates, while banks' minimum reserve requirements are to remain at 1%.
After a lull this week, local events ramp up again next week with an RBA meeting (Tue) and labour market data (Thu) awaiting. With recent data coming in broadly consistent with RBA forecasts, there seems little need for the Board to shift its messaging, reaffirming that it remains attentive to inflation risks while signalling that it is not ruling anything in or out from a policy perspective. Meanwhile, coming off a seasonally weak period either side of the new year, February's labour force survey is anticipated to report a rebound in employment (40k), easing the unemployment rate back to 4% from 4.1%.
