Macroeconomics: The Day Ahead for 19 March

Once the BoJ policy tweaks, as expected Japan National CPI, along with UK PSNB and GfK Consumer Confidence have been digested, there is a fairly minimalist schedule of data and events to contend with. Statistically there is only the less than timely Canada Retail Sales, while the events schedule has a goodly volume of ECB and BoE speakers along with the rate decision in Russia. A combative start to the first round of bilateral US-China talks since the start of the Biden presidency will be unsettling for markets that had been hoping for less confrontation, though the rhetoric on both sides has not offered any support for that hope.

Bank Rossi is expected to hold rates at 4.25%, but with inflation elevated (Feb 5.7%) and the RUB caught between support from stronger oil prices and adverse politics, a surprise rate hike is not off the table, and even if it does hold rates, Nabiullina will hint strongly that a rate hike is a near certainty in Q2 (as OFZ bond yields are effectively discounting – see chart). Taking stock of this week’s central bank moves, the Fed is sticking to its ‘patience’ mantra, while the BoE remains emphatically reactive rather than proactive. But with Norges Bank signalling an H2 rate hike, which the Czech Republic’s CNB will likely follow next week, and Brazil and Turkey opting for sharper than expected rate hikes of 75 bps and 200 bps respectively, it should be obvious that a policy tightening cycle is underway, even if major central banks continue to push back against it.

There were few surprises from the BoJ’s policy tweaks which had been heavily flagged ahead of the meeting, with the 5 bps increase to 25 bps in the 10-yr yield target, giving it greater flexibility in purchase timing, as with the changes to its ETF purchases, where the only surprise is that the BoJ will only purchase Topix-linked ETFs. The BoJ remains far away from achieving its inflation target, and as much as these moves could in extremis be termed stealth tapering, this is not an exit strategy, but rather an operational adjustment given some practical long-term limits to what it can actually purchase. Given the steep rise in UST yields in reaction to the FOMC meeting, the BoJ decisions are really nothing more than a sideshow.

Given a lack of major data or events, the question is whether yesterday’s plunge in oil prices on the back of concerns about demand given the slow vaccine roll-out in Europe, and adverse news on Covid-19 infection and mortality rates in other countries, above all Brazil and India, will help to ease the post-FOMC upward pressure on US / G7 govt bond yields, and pare some of the recent USD strength. In terms of the oil move, a further concern is whether the very risky fad for ‘chasing yield’ on the futures roll-down will prompt some more drastic paring of speculative positions, as near month price spreads narrow (see charts). Indeed with the total non-commercial (speculative/fund) net long in commodity market still close to record highs, the observable spill-over from the oil price slide into many other commodities does raise some concerns about a broader unwind of positions, even if the ‘buy the dip’ mentality in risk markets remains a very real phenomenon. As ever it really boils down to the extent of the imbalances in positioning and the speed of price changes, which may or may not result in forced liquidations.

Next week has a busy schedule of data from the US (Durable Goods, Existing & New home Sales, Goods Trade Balance, Personal Income/PCE, Q4 Current Account & final GDP) and the UK (labour data, CPI, RPI & PPI, Retail Sales and both CBI surveys) as well as the G7 flash PMIs, German Ifo survey and Tokyo CPI. The SNB is unsurprisingly expected to hold its policy rate at next week’s meeting, and should express some relief over a weaker CHF though still affirming that it remains overvalued; China’s Loan Prime Rates are expected to be unchanged, and there will be yet another deluge of G7 central bank speakers.