Morning Bid: Some China cheer as central banks enter the starting gates

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(Reuters) – A look at the day ahead in European and global markets from Wayne Cole

It’s been a mostly quiet start to a busy week in Asia, though China came bearing positive surprises as industrial output and retail sales beat forecasts.

A 7% y/y jump in output for January and February, combined to smooth out the Lunar New Year effect, handily topped the 5% market median and adds to evidence that factory growth globally is picking up again. Eyes are now on a raft of PMIs due on Thursday to reinforce the message.

Not so hot was a 9% y/y drop in Chinese property investment, the country’s Achilles heel and another argument for the People’s Bank of China to lower loan rates on Wednesday.

It’s a packed week for policy makers as central banks in the United States, Japan, UK, Switzerland, Norway, Australia, Indonesia, Taiwan, Turkey, Brazil and Mexico all meet.

Speculation is rife the Bank of Japan (BOJ) will end eight years of negative interest rates on Tuesday and cease or amend its yield curve control policy.

The Nikkei newspaper on Saturday became just the latest media outlet to flag the move, after major companies granted the biggest pay hikes in 33 years.

There is a chance the BOJ might wait for its April 26 meeting given that is when it will issue updated economic forecasts, though it has dropped so many hints recently that the market is fully priced for a move now.

One-month rates have climbed into positive territory for the first time since 2016, albeit to just 0.01%. So discounted is a change that the yen has been easing broadly and the dollar has regained the 149.00 handle.

That, in part, reflects expectations the BOJ will be at pains to emphasise it is not aiming to tighten policy but rather slowly transition to something less extraordinary.

As a result, the market sees rates around 0.26% by the end of the year which would still make the yen the funding currency of choice for carry trades.

DOT PLOTS IN FOCUS

The Reserve Bank of Australia (RBA) also meets Tuesday and is certain to hold at 4.35%, though there is a chance it might further water down its tightening bias.

Likewise, the Federal Reserve is considered certain to keep U.S. rates at 5.25-5.5% on Wednesday and all eyes will be on the FOMC dot plots for rates and inflation.

Analysts assume policy makers will look through the recent run of unhelpfully high inflation readings as a seasonal and statistical aberration, but there has to be a risk the median dot plot shifts to two 25 bps rate cuts this year rather than the former three cuts.

Futures now imply around a 58% chance of a first rate cut in June, compared to 75% a week ago, and have about 73 basis points of easing priced in for this year.

Much will depend on what tone Chair Jerome Powell chooses to adopt at his post-meeting media conference, with cautious optimism being favoured recently.

The Bank of England (BoE) meets Thursday and is likely to hold at 5.25% – a cut is priced as a 2% chance. A first easing in June is put at 50-50, with 25 bps fully priced in for August and 60 bps for all of 2024.

Inflation data for February is due on Wednesday and the outcome could set the tone for the meeting.

Markets see rather more chance – around 29% – the Swiss National Bank (SNB) could trim its 1.75% rate on Thursday. Consumer price inflation is running 0.6 ppts below the bank’s 1.8% first-quarter forecast, while core inflation of 1.1% is the lowest since January 2022.

The Swiss franc has eased from record highs on the euro over the last couple of months, breaking through the floor of a huge upward trend channel stretching back to early 2021.

Yet, the franc’s real effective exchange rate is still the highest it’s been since a brief crisis-induced spike in 2011 and a major disinflationary drag on the economy, arguing for lower rates now that the SNB has backed away from intervention.

Key developments that could influence markets on Monday:

– Bank of Japan starts two-day policy meeting

– Participation by ECB bank supervisor Claudia Buch in fireside chat

– Euro Zone final inflation data for Feb and the total trade balance for Jan

Source: Investing.com