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Disinflation fears in March macros

March trading is upon us – the start of the month, the end of the quarter – and the biggest week of macro data begins today.

Disinflation fears
Source: Bloomberg

I can already tell you what the word of the week will be: ‘disinflation’.

Every single central bank is talking about it, barring the Fed and possibly the BoE. Over the weekend China joined the world’s chorus around the fear of disinflation.

Its official manufacturing PMI came in a tick under even at 49.9. However, it was the news from the PBoC that saw China laying the ground work for lowering their GDP outlook at the National People’s Congress on Thursday as they cut interest rates for the second time in three months.

One-year deposit rates were lowered 25 basis points (bps) to 2.5% and one-year lending rates were also lowered by 25bps to 5.35% from 1 March. The interesting situation here is this is unlikely to be the last move in interest rates from the PBoC. Why can I make that inference? The global slowdown is having a major impact on real interest rates in China as inflation falls and rates remain high.

This issue is severely impeding business’s ability to grow. The PBoC will have to work hard to maintain growth stability if real rates continue to rise. China remains the macro to watch as it grapples with fiscal policy reform while maintaining a growth strategy conducive to full employment and prosperity.

Europe sees the release of CPI, unemployment, retail sales, service and manufacturing PMI data in the next three days, culminating in an ECB meeting on Thursday night. We will likely out finer details around the €60 billion QE program and talk of the EUR’s general course. It would be pleasing from Draghi’s perspective to see the currency under $1.12.

We also hear from the BoE and the Bank of Canada in the middle of the week. The BoE is unlikely to move in either direction but the BoC may move lower. It’s unlikely, though. From an Australian perspective, Canada’s GDP read tomorrow night will be very interesting considering the massive decline in oil prices during Q4. If we see signs of growth in other areas of the economy, Australia should take note and hopefully learn from Canada’s ability to proactively handle the cyclical downturn in commodities.

Finally, the US. The first week of the month always has a slow rise in data drops, culminating in the biggest read of the week as non-farm payrolls is released on Friday. However, once again it’s likely to be the case that Fed officials will steal the limelight. Over the weekend Vice Chairman Stanley Fischer told CNBC that ‘it’s about time’ for a rate rise from the FOMC. He did go on to further clarify this comment, saying there is a ‘high probability’ of rates rising in 2015, meaning there was a more hawkish call from a highly prominent voting member. There are six major speeches by Fed members and I think the USD will be in for some interesting trading this week.

This brings us to Australia. There are minor macro drops today but most of the information that is likely to influence the RBA at tomorrow’s board meeting has already come out. The capex and wage reads last week have to be a major concern for the bank as it looks to engineer some form of recovery in the non-mining sectors, stave off disinflation in wages and improve core reads.

It would probably have wanted to see the GDP read on Wednesday to find out how much growth has been affected in the fourth quarter by the commodity collapse. However, holding off on a second rate cut to incorporate this read would seem counter-productive. From the new mantra they mentioned in the February meeting, and considering it has already moved its growth outlook to the downside, a confirmation of this on Wednesday would have no major bearing. Currently the interbank market is factoring in a 48.9% chance of a rate cut tomorrow – of the 29 economists surveyed by Bloomberg, 62% expect a 25bps cut tomorrow.

The ASX read on Friday suggested it too expects a cut tomorrow. Trade in CBA, Telstra, CSL and the like was very strong on Friday for stocks that are ex-div and are either at record highs or nearing 13-year highs. The momentum is palpable and the crowdedness is concerning.

Based on the futures market from Saturday, we are calling the ASX up 12 points to 5941. This would mean we could see a further test of the resistance level for the fourth time in two weeks – will it break above?

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