A change of perspective
View from the Trading Desk
While the Federal Reserve and Bank of England are determined to tighten monetary policy in the face of inflation, not all central bankers are willing to be that single-minded in their pursuit of price stability. Last week’s European Central Bank meeting left observers less impressed with its eagerness to act. We’ve highlighted that raising rates will likely only meaningfully impact certain types of inflationary pressures; the Eurozone faces the economic impacts of the ongoing war in Ukraine more keenly than the rest of the world. Even so, Bloomberg shows that the market expects the ECB’s policy rate above zero by year-end, which is fundamentally unchanged from before the press conference.
The other major central bank that’s in no particular hurry to keep pace with the Fed is the Bank of Japan, which seems not only constructive about the Yen’s precipitous decline, but has expressed views embracing the inflation uplift granted by the currency depreciation. Accustomed to combating Yen appreciation, Japanese central bankers are suddenly confronted by the opposite prospect, the cost of which will likely accrue to consumers. However, the tone changed recently when the extent of the decline in the Yen became more apparent and relentless. The Yen has lost more than 11% against the Greenback in the past six weeks and reached 20-year lows.
Bottom line: In the final year of Haruhiko Kuroda’s term as Bank of Japan Governor, he’s trying to maintain parity with the government’s accommodating stance but is also concerned about very quick swings in the Yen’s value. His comments have changed in past days, maintaining an accommodating stance but now hinting that dramatic swings might be unwelcome, saying ‘recent Yen moves have been very rapid… that can cause troubles for companies when they make their business plans, and we will need to take into account negative factors like these.’ Even so, it seems much of the monetary policy disparity with the Fed might be priced—forecasts do suggest that USD/JPY may reach 130 in the coming months.
The week ahead
It’s been a mixed bag this year for Sterling, gaining against Scandinavian currencies and the Japanese Yen, while losing out to a Federal Reserve-supported US Dollar. The commodity rally has pushed the Pound lower against both the Aussie and Kiwi Dollar, a narrative that looks likely to continue with UK inflation hitting its highest level since 1992 in March. Stagflation worries in the UK are rising; in some of the first signs that growth is slowing, consumer discretionary spending was 10% below pre-pandemic levels in the first week of April, while footfall to entertainment venues flatlined. The balancing act for inflation and growth will demand delicate management from the Bank of England. Analysts at RSM expect the central bank to hike by 25 basis points in the coming May meeting, and hold a 1% interest rate going into the second half of the year while also monitoring growth.
- Monetary Policy Committee member Catherine Mann is due to speak on Thursday at 2:00PM.
- Bank of England Governor Andrew Bailey will be speaking at Macro Week 2022 on Thursday and the International Monetary Fund (IMF) meetings this Friday.
- UK Retail Sales data m/m for March is expected to read -0.3%, the same as the February print.
- Flash Manufacturing and Services Purchasing Managers’ Indices are forecast to come in at 54.3 and 59.9, respectively, and will be released on Friday.
The Euro has declined over 5.0% against the US Dollar year-to-date, trading close to a low last seen two years ago during the onset of the Coronavirus pandemic. The European Central Bank isn’t expected to tighten monetary policy until Q3 this year, which is likely to cap any significant upside in the common currency during Q2. Russia has begun a fresh ground offensive in the eastern portion of Ukraine, and the World Bank has slashed the projected global growth rate to 3.2%. Meanwhile, the International Monetary Fund is expected to provide its economic outlook today. European markets have drifted lower in the first trading session following the Easter bank holiday as uncertainty around growth and inflation continues to weigh on risk assets.
- Eurozone Industrial Production m/m for February is forecast to come in at 0.8% compared to a 0.0% reading in January.
- German Bundesbank President Joachim Nagel will be speaking at the IMF meetings on Wednesday.
- European Central Bank President Christine Lagarde is due to speak on Thursday and Friday this week.
- German flash Manufacturing and Services PMIs are expected to read 54.6 and 55.4, respectively.
US Dollar strength continues into this week, with the Greenback reaching a 20-year high against the Japanese Yen as markets ramp up their bets on greater monetary policy divergence between the Federal Reserve and Bank of Japan. James Bullard, President of the Federal Reserve Bank of St. Louis, said yesterday that a 50 basis-point interest rate hike may not be his base case, suggesting the central bank needs to move faster to normalise policy. Bullard has voiced his desire for a 3.5% interest rate, with the neutral rate—which will lead to neither expansion nor contraction—estimated to be close to 2.4%. A decision on the balance sheet is expected in May, with a run-off potentially starting in June.
- The latest Philadelphia Fed Manufacturing Index data will be published on Thursday. Forecasts indicate a 20.6 reading.
- US Unemployment Claims for the week ending the 16th of April are expected to read 190K, little changed from 185K a week previously.
- Federal Reserve Chairman Jerome Powell is due to speak this Thursday at the IMF meetings.
- The US will also be reporting flash Manufacturing and Services PMI data at the end of the week, with forecasts predicting 58.1 and 58.0 readings.
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