News: Take Five: Week of the central banks.
(Reuters) – 1 / WITHDRAW TIME?
After an impressive US Treasury sell-off pushed the 10-year benchmark yield above 1.6%, its highest level since the start of the year, the Federal Reserve meeting March 16-17 will be watched closely for clues that policymakers are concerned about returns, asset bubbles and inflation.
A reassessment of market rate expectations in order to expect the Fed to hike by the end of 2022 runs counter to the Fed’s goal of keeping rates unchanged until the end of 2023. The Fed didn’t seem to have been affected by higher bond yields so far, but it may feel like it’s time to fight back against these rate hike bets.
New economic growth forecasts are also expected to be released as vaccines are distributed.
Chart: Eurodollar futures and Fed raise expectations –
2 / MIXED MESSAGES AT BOJ
The central bank, which pioneered the control of yield curves, faces one of its toughest policy reviews March 18-19.
The Bank of Japan is likely to include clearer guidance in its statement on what sources it sees as an acceptable level of volatility in long-term interest rates – a sign that it will not tolerate spikes that harm the economy.
Governor Haruhiko Kuroda and his deputy Masayoshi Amamiya have sent mixed messages to ease the 10-year yield band. Higher yields would recognize a global move higher, but could spark unintended concerns about policy tightening.
With economic recovery emerging, the BOJ might even suggest scope for more negative short-term rates. Meanwhile, year-end returns in the yen are accelerating. A currency rally will add to the BOJ’s headache.
Graphic: BOJ Balance Sheet & Returns –
3 / BOE, ALSO NORGES BANK
Thursday brings central bank meetings in the UK and Norway.
The Bank of England will not announce any additional policy easing despite concerns over recent hike in borrowing costs.
Instead, measures like increasing the BoE’s firepower to buy bonds are expected to come later in the year – possibly in May, when the next economic outlook is in.
With pandemic lockdowns and Brexit disruptions expected to decline nearly 4% in Q1 GDP data, a gradual economic recovery is expected. A majority of the economists polled by Reuters expect GDP to take two years to return to pre-COVID-19 levels.
Norges Bank is also inclined to keep rates unchanged, but could take a much more hawkish tone given signs of an economic recovery in Norway, particularly in housing construction.
Graphic: UK return –
4 / EMERGING RATES ON RISE
Emerging markets may be the only way for interest rates to rise. That is the message we may hear from several central banks in the coming days.
Most have been facing rising inflationary pressures for some time, but now they are also facing higher US Treasury bond yields, which add to the cost of borrowing for everyone. For oil importers, Brent crude prices above $ 70 are an additional problem – all while economies are still being hit by the effects of the coronavirus.
Central banks in Brazil and Turkey, which meet on Wednesday and Thursday, respectively, are the most likely to hike rates. Markets will also find out on Thursday whether Indonesia’s rate cut cycle has ended.
Egypt stands on Thursday despite rising commodity prices and rising inflation.
Chart: EM central banks rate cuts –
5 / OPTIONS
In the euro area, investors focus on politics.
The federal states of Baden-Württemberg and Rhineland-Palatinate will hold elections on Sunday, which will be seen as a key test of the mood ahead of the national elections in September and will determine who will succeed Angela Merkel as Chancellor.
The Baden-Württemberg vote can be observed because a procurement scandal for face masks has clouded the water for Merkel’s Christian Democrats, whose leader Armin Laschet hopes to become the next chancellor.
Then there will be Dutch national elections from March 15-17, where the authorities will relax the rules on the evening curfew to fight the spread of COVID-19. According to polls, Prime Minister Mark Rutte’s Conservative VVD will remain the largest party, although public support for its coronavirus policies has recently declined.
Graphic: COVID-19 vaccinations – the race is on –
Reporting by Saikat Chatterjee, Karin Strohecker and Dhara Ranasinghe in London, Gertrude Chavez-Dreyfuss and Kate Duguid in New York and Vidya Ranganathan in Singapore; Adaptation by Dhara Ranasinghe and Catherine Evans
Original Source © Reuters