Central Banks in the spotlight

Around the world this week, central banks hold the key to price action.

Source: Bloomberg

Bank of Japan

- Expecting no change to monetary policy at the BoJ. Policy is likely to remain highly accommodative despite market rumblings the BoJ might drop several of its inflation targets.

- Inflation over the first quarter has declined in the main to energy. However, core inflation has held steady, yet it is still a way off target ranges.

- Activity indexes and surveys have strengthened over the quarter with consumer spending increasing solidly – could this pick up Abe’s interest in bringing the next consumption tax increase forward? Unlikely, but the talk is likely to drift to this subject and could cause slight trading blips in the Nikkei.

- USD/JPY is at ¥121.37 and is up 20% in 365 days and very clearly is looking to test 122 again. Thursday morning will be a big moving day for the pair.

Reserve Bank of Australia

- Minutes to be released today and all RBA watchers will immediately turn to the page marked ‘housing’.  It was clear from the statement on March 3, the hot housing market certainly stopped it pressing the button again. Question is, will the housing market hold them off permanently? 

- Watch for comments around employment and the fact is, its remains elevated compared to historical norms.

- The key signal for a possible second rate cut from the RBA could come down to comments and discussions around inflation. If, as expected, Governor Stevens sees inflation being maintained in the RBA’s ‘comfort band’, expectations for an April cut will diminish further as the next CPI read is not due till mid-April post the April meeting and is likely to allow the RBA more room to hold rate. (Currently the interbank market see an April rate cut as a 37% chance)

- Come May however, the RBA will have a more complete picture as first quarter inflation figures will be released. It will have three months of rate cut data to process and there will be further reads on employment, wage growth and the translation of the economy from mining to non-mining. On current data (which is very soft) the interbank market estimates there is a 89% chance of a 25 basis point rate cut at the May meeting – this has been steadily declining over the past two weeks - it was above 100% after the March meeting.

Federal Reserve

- All but half a handful of economists expect the word ‘patient’ to be removed from its forward guidance on Thursday morning. This makes every meeting from Thursday onwards a live event as the Fed is now ‘data dependent’ on rate hikes.

- Changes to the ‘dots’ is expected with the longer-run estimates likely to increase slightly as we move towards higher rates in the short term pushing the currently neutral outlook on longer-run rate slightly higher.

- USD – expect some dialog about the impact the appreciating dollar is having on US firms. The board may look to include the USD into its ‘data dependant’ matrix in an attempt to cap the USD’s rapid appreciation.

- Inflation is also the Fed’s biggest dilemma – expectations are that 2015 estimates may be revised down further.

- All these expected announcements should be built into the dollar’s short term expectations – breaks from these expectations will cause gyrations in currency markets as the USD will move rapidly in either direction is expectations are not met.  

Ahead of the Australian open

WTI made and new six-year-low falling below US$43 a barrel for the first time since March 2009. The slide in oil looks like returning to the issues seen at the start of the year. This is despite the fact US dig rigs have been idled. The question is; will WTI hit the magical US$40 a barrel forecast the market was predicting in February?

The USD actually eased slightly overnight, giving the US markets some room to breathe and snap back into line with the DOW adding over 228 points at the close. The market everyone is talking about is the DAX which crossed the 12,000 point mark for the first time in its history as its three largest carmakers in Daimler, Volkswagen and BMW all appreciated over 26% in the first ten week of 2015 – the lower EUR and ECB stimulus is powering the DAX to record level and it looks unlikely to slow anytime soon.

We are currently calling the ASX 200 up 36 points to 5834 as dips in the market remain shallow and well bid when the banks fall between 2% to 3%. Will be a solid day, however, energy is unlikely to see any respite.

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