The Daily Update: The Week Ahead

Last week was a major week for central bank meetings with the Fed, BoE and BoJ all holding meetings. The Fed acknowledged the improved economic outlook: Fed officials’ median estimate of GDP growth forecast for 2021 was revised up to 6.5% (Q4 yoy) from 4.2% in December. Nevertheless, Jerome Powell noted: “The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” Importantly, the dot plot showed the median of Fed officials’ interest rate projection at near zero through 2023. In terms of inflation, Powell commented: “Over the next few months, 12-month measures of inflation will move up as the very low readings from March and April of last year fall out of the calculation.” But “these one-time increases in prices are likely to have only transient effects on inflation.” The median core PCE projection is for 2.4% this year, easing to 2% in 2022 and edging to 2.1% in 2023.

The belly of the UST curve came under pressure last week: the UST 10 year backed up 9bps to end the week at 1.72% and the 30 year yield increased 6bps to 2.44%. The 5s30s spread widened 1 bps to 155bps at Friday’s close. Market sentiment was also not helped when on Friday the Fed announced that the supplementary leverage ratio (SLR) exemption granted in March 2020 would expire at the end of this month: the exemption had allowed banks to exclude USTs and reserves held at the central bank from the SLR calculation. Fed officials do not expect the move to hamper markets as they view the large banks as holding sufficient capital, but the announcement does allow for future adjustments noting “the Board may need to address the current design and calibration of the SLR over time” and will seek comment on potential modifications. Aside from the Nasdaq, equities generally ended Friday on a sour note: over the week the S&P 500 and Nasdaq indices fell 0.77% and 0.79% respectively.

The BoJ kept interest rates at -0.1% but following a policy review, announced a number of tweaks to increase policy flexibility while maintaining “QQE with Yield Curve Control has been effective in pushing up economic activity and prices through a decline in interest rates.” Broadly, the moves are designed to make policy more effective and sustainable over the longer term. The tweaks included setting a wider trading range for bonds: the trading range around the 10 year bond increased to ~25bps either side of zero when it had previously been thought to be ~20bps. The BoJ statement noted the importance of striking “an appropriate balance between maintaining market functioning and controlling interest rates by allowing interest rates to fluctuate to a certain degree”. The BoJ also removed an annual buying guidance for stock funds of 6tn yen (USD55bn) although it retained the upper limit of 12tn yen to give it flexibility to intervene when required noting that purchases tend to be more effective in periods of instability. These purchases would also target the more broad-based Topix index rather than the Nikkei 225. It also proposed to incentivise bank lending and adjust reserves if interest rates move further into negative territory: addressing the impact on bank profitability creates scope for rates to be lowered further.

Elsewhere, the BoE left its policy settings unchanged and noted some near term improvement in the outlook for the economy: the 10 year gilt yield backed up 2bps to 0.84% over the week. Economic data releases from China continued to point to economic recovery although there was a low base effect: industrial production and retail sales data for January-February grew at 35.1% yoy and 33.8% yoy respectively which were ahead of expectations. Fixed asset investment was weaker than expected for the January-February period increasing 35% yoy. In contrast, infections are continuing to rise in parts of Europe forcing a further lockdown in Paris and some regions of France and in Poland. Angela Merkel is to meet with state leaders today to discuss an extension of lockdown restrictions. Europe continues to lag the UK and US in terms of vaccine rollout with negative implications for the speed of economic recovery.

In the week ahead, the EU leaders’ summit on Thursday is likely to see the covid and vaccination situation discussed among a number of other issues. The German IFO survey for March is due on Friday which will be monitored to gauge how the economy is faring given continued infections and restrictions and a slow vaccination rollout. The flash readings for the March Markit PMI for manufacturing and services are due for the Eurozone, France, Germany, US, UK on Wednesday. US data releases include the Chicago Fed National Activity Index for February, new and existing home sales data for February, preliminary durable goods order data for February. On Friday personal income and spending data for February is due along with the PCE deflator. The final reading of the March University of Michigan consumer sentiment index is also due.

Jerome Powell and Janet Yellen are due to testify before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday. There is a large number of central bank speakers due to appear this week: Jerome Powell, Christine Lagarde and Andrew Bailey are all due to participate in a Bank of International Settlement event this week. Fed speakers include Thomas Barkin, Mary Daly, James Bullard, John Williams, Charles Evans and Raphael Bostic. ECB speakers include board members Isabel Schnabel and Luis de Guindos. Other central bank news-flow includes rate decisions from Mexico and South Africa: this follows rate increases by the central banks of Brazil, Turkey and Russia last week. The Turkish lira and central bank policy are likely to remain a focus this week after the central bank governor Naci Agbal was replaced over the weekend in a move seen as damaging investor confidence. Earlier today the PBoC left the 1 and 5 year Loan Prime Rates unchanged at 3.85% and 4.65% respectively.