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Markets still digesting ECB action

The markets are fickle-minded when it comes to assessing the impact of ECB action and what it means in the longer term.

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Mario Draghi
Source: Bloomberg

It did not help that ECB Chief Draghi cautioned that he doesn’t anticipate further rate hikes given the current assessment, which suggested that the aggressive easing package is probably a ‘show-hand’ in gambling parlance, for the foreseeable future.

The reality is that policymakers are extremely sensitive to changes in the economic environment. If inflation and growth remain elusive, who is to say that the central banks won’t do more? However, the problem is that central bank policy is increasingly losing their efficacy in resolving global economic ills.

The favourite argument for pro-easing is to ask you to consider that the situation would be a lot worse if there is no loose monetary policy. Well, we wouldn’t really know that, would we? That said, I don’t envy the ninja-level challenges that the central bankers and policymakers are facing amid an unprecedented global situation.

This difficulty in forecasting how policymakers will do down the road is confusing the financial markets. Risk assets rallied on the aggressive action, but retreated sharply on growing perceptions that there won’t be any more easing measures.

What’s more certain is that monetary conditions remain accommodative, and rates are going to stay low for some time. Draghi said he sees rates at present or lower levels for extended time as risks to euro-area growth outlook are tilted to the downside.


Week ahead: Fed and BOJ after ECB

The ECB bazooka may have some bearing on the US Federal Reserve and Bank of Japan when they decide on monetary policy next week. Central banks will still be the main catalysts for financial markets in the coming week.

From a policy action perspective, the 15-16 March FOMC meeting is expected to be a non-event, however it will hold significant sway in shaping market expectations because the latest economic projections and the so-called dot plot will be released.

There is still a gulf between the Fed projections and market expectations on the number of rate hikes this year. They have to narrow at some point. This is what the market will be monitoring to determine if the Fed is still on a tightening bias in 2016. IG Australia also produced this video on five questions that Yellen needs to answer.

Most expects the BOJ to stay put after introducing negative interest rates previously. Governor Kuroda has also commented that he is not looking to push interest rates deeper at the moment. Positive developments around the Japanese economy and global markets provided room for the central bank to put policy on hold this month.

Furthermore, they probably want to assess the impact of negative interest rates on the economy before adjusting policies further. The post-ECB increase in euro may also reduce the urgency for BOJ to take more action next week, although it is likely that they make cut interest rates deeper from April onwards.

Other central bank events include Bank of England (BOE) policy meeting and the minutes of the Reserve Bank of Australia’s meeting on 1st March 2016.


Data-heavy week

On the data front, a bunch of US data will be watched closely for clues that the recent improvement in manufacturing activity and resilient jobs report point towards a resilient US economy. We have retail sales, housing data, inflation readings, industrial production, and some sentiments surveys lined up.

In China, nothing significant next week unless data on money supply and credit are not released over the weekend (12-13 March). We will eye several economic data in Japan in the coming week, including machine orders, industrial production, and trade figures.

In Singapore, it is worthwhile to look out for retail sales and NODX numbers to gauge the strength of the local economy. Recent news of company retrenchments have raised concerns that Singapore is looking at more tough times ahead. It would also be an interesting lead up to the 2016 Budget announcement on 24 March.


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