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by Charalambos Pissouros

Weekly Outlook: Mar 18 – Mar 22: Brexit Stays in Spotlight; Fed, BoE, SNB and Norges Bank Meet

We have a packed week ahead of us, with four major central banks deciding on interest rates: The Fed, the BoE, the SNB and the Norges Bank. The only one expected to act on interest rates is the Norges Bank, which is forecast to hike. With regards to the Fed, although it is very unlikely to change policy, investors may be eager to see the updated “dot plot”. We don’t expect any fireworks from the SNB, while the BoE may also attract less attention. The focus will once again be on the Brexit landscape, as we may have another vote on Theresa May’s deal.

Monday is the only relatively light day during this loaded week. The only indicators worth mentioning today are Eurozone’s trade balance for January and the US NAHB housing market index for March. Eurozone’s trade balance is expected to have turned to a EUR 8.0bn deficit after a 17bn surplus in December. This would be the bloc’s first deficit since January 2017. The US NAHB index is expected to have ticked up to 63 from 62.

On Tuesday, during the Asian morning, the minutes of the latest RBA policy gathering are due to be released, but we don’t expect any fireworks. The statement of that meeting contained little information compared to the previous one and given that the minutes of the February meeting echoed Governor Lowe’s remarks with regards to a rate cut by year end, we expect the March minutes to be along the same lines as the February ones.

During the European morning, the UK employment data for January is coming out. Expectations are for the unemployment rate to have remained unchanged at 4.0%, its lowest since 1975, while average weekly earnings including bonuses are anticipated to have slowed to +3.2% yoy from +3.4% in December. The excluding bonuses rate is expected to have remained unchanged at +3.4% yoy. According to the IHS Markit/KPMG & REC Report on Jobs for the month, with vacancies increasing and labor supply declining, starting and temporary wages both grew at historically strong rates, which tilts the risks surrounding the earnings forecasts to the upside.

UK earnings vs CPI real wage growth

From Germany, we get the ZEW survey for March. Expectations are for the current conditions index to have declined to 11.2 from 15.0. The economic sentiment index is anticipated to have risen, but to have remained in negative territory. Specifically, it is forecast to increase to -11.0 from -13.4. Eurozone’s wage growth and labor costs indices for Q4 are also coming out, but no forecast is available for neither release.

On Wednesday, the highlights are likely to be a new Brexit vote in the UK Parliament and the FOMC monetary policy decision.

Kicking off with UK politics, in a series of votes last week, UK lawmakers voted down the updated accord Theresa May had put back on the table, rejected a no-deal Brexit under any circumstances, and voted in favor of extending Article 50. The motion approved is setting out the option for asking the EU a short delay if a Brexit accord is agreed by March 20th, or a longer otherwise. Remember that consent from all 27 member- states is needed for a delay to take flesh, and whether members will accept the UK’s request is something we may learn at the EU summit beginning Thursday. Meanwhile, EU Council President Donald Tusk said on Thursday that leaders may consider an extension of at least one year if the UK finds it necessary to rethink its strategy. Therefore, the thread of a longer extension, which could result in a softer deal of even no Brexit at all, may prompt some hardliners to support May’s deal at this third “meaningful vote”.

Passing the ball to the FOMC, this would be one of the “bigger” meetings, where apart from the statement and Fed Chief Powell’s press conference, we also get updated economic forecasts. Conditional upon officials keeping the Fed funds rate unchanged as it is broadly anticipated, most of the attention is likely to fall on the updated economic projections, and especially the new “dot plot”.

Following the Fed’s shift to a “patent” stance in January, the dot plot is most likely to be revised lower, but the question is: How much? The December plot suggested 2 hikes in 2019, but according to the Fed funds futures, market participants are nearly 75% confident that the Committee will refrain from acting this year, while there is a 25% chance for a rate cut. The probability for a hike is still at 0%. According to the minutes of the January meeting, several members suggested that a hike would be necessary only if inflation accelerates higher than their baseline outlook, while several others argued that they see the case of raising rates later this year as appropriate, even if the economy evolves as expected. Thus, even though the dot plot could be revised lower, it may not match the pessimistic view of the market. A downside revision to 1 rate increase this year would still be well above investors’ consensus and thereby, encourage them to put some hike bets on the table.

Fed funds futures market vs Fed forecasts

As for Wednesday’s economic data, we get the UK CPIs for February. The forecasts are for both the headline and core rates to have remained unchanged at +1.8% yoy and +1.9% yoy. As we noted in the past, barring any major deviations from the forecasts, pre-Brexit inflation numbers are unlikely to attract much attention, especially this set, which may be overshadowed by the third “meaningful vote” on UK PM May’s Brexit deal.

UK CPIs inflation

On Thursday, the central bank torch will be passed to the Norges Bank, the SNB and the Bank of England.

Kicking off with the Norges Bank, at its last meeting, it kept interest rates unchanged at +0.75%, reiterating that “the policy rate would most likely be raised in March 2019”.  Officials also noted that outlook for the future rate path was little changed since the December gathering. Latest data showed that GDP for Q4 slowed to +0.5% qoq from +0.6%, but mainland growth accelerated to +0.9% qoq from +0.4%, while inflation numbers for February surprised to the upside. With the inflation rates and mainland GDP above the Bank’s December projections, we believe that the door is wide open for officials to proceed with hiking rates at this gathering.

Norges Bank interest rates

That said, if this is the case, we expect market attention to quickly turn to the updated economic projections and the new rate path. After all, investors already anticipate a hike at this gathering, and the rally in the Krone following February’s inflation data confirms the notion. They may be more eager to find out whether and when policymakers are planning to act again.

Passing the ball to the SNB, when they last gathered, Swiss policymakers kept their benchmark interest rate unchanged at -0.75%, reiterating that they will remain active in the foreign exchange market as necessary, and that the franc remains highly valued. They also downgraded their inflation projections, with the CPI not anticipated to hit their 2% target even in Q3 2021, and this was conditional upon interest rates staying at current levels for the whole forecast horizon. Latest data showed that Switzerland’s CPI rate remained subdued at +0.6% yoy in March and thus, we see it unlikely for SNB officials to alter their stance around policy at this gathering.

Moving to the BoE, this Bank anticipated to keep policy untouched as well. This would be one of the “smaller” meetings that are not accompanied by a quarterly Inflation Report, neither by a press conference by Governor Mark Carney. Thus, the focus may be in the accompanying statement and the meeting minutes.

In February, officials decided unanimously to stand pat, reiterating that an ongoing tightening at a gradual pace and to a limited extend would be appropriate. In the minutes, they repeated the view that whatever form Brexit takes, the monetary policy response could be in either direction, while at the press conference, Governor Carney said that there is upside risk for the UK economy if a Brexit deal is agreed soon. With most data suggesting that Brexit uncertainty is already weighing on the UK economy, it will be interesting to see whether officials continue to see such upside risks in the economy in case of a Brexit deal, especially if an accord is approved by UK lawmakers on Wednesday, while in the event of another deal-rejection, we will be very eager to find out whether BoE policymakers continue to hold the view that rates could move in either direction, even in case of a no-deal outcome. According to BoE’s latest data for the forward curve of the UK OIS (overnight index swaps), a rate hike is fully priced in for March 2021.

UK OIS forward curve

As for Thursday’s data, during the early Asian morning, New Zealand’s GDP for Q4 is coming out. Expectations are for the qoq rate to have doubled to +0.6% from +0.3% in Q3. That said though, a quarterly rate of +0.6% would still be below the RBNZ’s own forecast for the last quarter of 2018, which is at +0.8%.  At its latest meeting, the RBNZ kept interest rates unchanged at +1.75%, with Governor Orr reiterating that the direction of the next move could be either up or down. At the meeting statement, the Governor noted that lower interest rates and government spending are expected to support a pick-up in GDP over 2019, but at the conference he repeated that if growth does not pick up, a cut may be appropriate. Thus, a growth rate below the Bank’s own projections may prompt participants to add to their rate cut bets.

The Australian employment data for February are also due to be released. The unemployment rate is anticipated to have remained unchanged, while the net change in employment is forecast to show that the economy added 15.2k jobs, after gaining 39.1k. Despite the potential slowdown in jobs growth, the unemployment rate is forecast to have stayed at its lowest since June 2011. That said, we don’t expect this to alter market expectations with regards to the RBA’s future rate-steps, especially following the Q4 GDP slowdown notably below the RBA’s own projection for the quarter. After all, RBA officials have put the prospect of a rate cut on the table, already acknowledging the strength of the Australian labor market.

As for the European day, the UK retail sales for February are due to be released. Expectations are for both headline and core sales to have slid, -0.4% mom and -0.5% mom after rising 1.0% and 1.2% respectively. This will drive both the yoy rates down to 3.4% and 3.0% from 4.2% and 4.1% respectively, something supported by the BRC retail sales monitor for the month, the yoy rate of which slid to -0.1% from +1.8%. In any case, we repeat this week’s UK data are unlikely to prove major market movers. Investors are likely to keep their gaze locked on the Brexit sequel and specifically, the new “meaningful vote” and the EU summit where EU members are expected to decide whether to approve or reject a Brexit-extension request.

From the US, we get the current account balance for Q4 and the Philadelphia Fed manufacturing index for March.

On Friday, during the Asian session, Japan’s National CPIs for February are scheduled to be released. No forecast is currently available for the headline rate, while the core one is anticipated to have stayed untouched at +0.8% yoy. The case for an unchanged core rate is supported by the core Tokyo CPI print for the month, which stood also stood steady, while the modest rise in the headline Tokyo rate suggests that the National headline figure may increase somewhat as well. In any case, all Japanese inflation metrics, including the BoJ’s own core CPI, remain well below the 2% objective and thus, we stick to our guns that Japanese policymakers are likely to stay put in the foreseeable future. After all, at the conference following last week’s meeting, Governor Kuroda himself noted that it is appropriate to continue with the current policy.

As for the European session, we have the preliminary manufacturing and services PMIs for March from several European nations the Eurozone as a whole. Expectations are for the bloc’s manufacturing index to have risen, but to have stayed within contractionary territory, while the services print, although still above 50, is expected to have slid somewhat. The composite PMI is anticipated to have risen to 52.1 from 51.9. Even though this would mark the second rise of the index after six consecutive months of declines, we believe that it is too early to start examining whether bloc’s economic activity has turned the corner. Even the ECB itself continues to see downside risks to the economic outlook according to Draghi’s introductory statement following the latest gathering, even after it pushed back its interest-guidance and announced a new round of TLTROs.

Eurozone PMIs vs GDP

Later in the day, we get preliminary PMIs for March from the US as well. Both the manufacturing and services Markit indices are expected to have risen, to 54.0 and 56.6 from 53.0 and 56.0 respectively. That said, as we noted several times in the past, investors tend to pay more attention to the ISM indices, which are scheduled for April 1st and 3rd. The US existing home sales for February are also due to be released.

In Canada, we have the CPIs for February and the nation’s retail sales for January. The headline CPI rate is expected to have ticked up to +1.5% yoy from +1.4%, while no forecast is currently available for the core rate. As far as retail sales are concerned, both headline and core sales are expected to have rebounded after sliding in December. Although this is expected to be a decent set of data, we doubt that it could tempt BoC policymakers to switch again their view on monetary policy. At the latest meeting, they turned dovish, altering their view for more rate increases over time and noting that “the outlook continues to warrant a policy interest rate that is below its neutral range”. They also highlighted the uncertainty surrounding the timing their future actions. Thus, we believe that they would like to see more improvement in economic data before they get confident again on more hikes in the months to come.

Canada CPIs inflation

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