Monetary policy decisions dominate the week ahead

Chris Scicluna
Emily Nicol

Fed rate lift-off on Wednesday, attention also on updated economic and dot plot forecasts
After Chair Powell’s testimony before Congress last week, there should be little doubt that Wednesday will bring lift-off for the Fed Funds Rate. And given his stated preference, we expect to see a large majority (if not all FOMC voting members) in favour of a conventional 25bps hike in the target range to 0.25-0.50%. Of significant interest will be the Fed’s updated economic forecasts, not least to what extent Russia’s invasion of Ukraine will impact its near-term growth and inflation outlook. And with money markets currently pricing in five rate hikes before the end of the year, the dot plots will also be closely watched, with the median rate forecast and the full range likely to have shifted notably higher (in December, the median FOMC member was forecasting just three hikes this year). The FOMC might also provide further insight into discussions for future balance sheet reduction, although Powell previously noted that a detailed plan would not be finalized until a subsequent meeting.

In terms of economic data, a number of February releases of note are due this week, including PPI (tomorrow), retail sales (Wednesday) and industrial production (Thursday). Reflecting higher energy prices, as well as other supply-related price pressures, Daiwa America’s Mike Moran expects producer prices to rise a further 0.8%M/M, bang in line with the average increase over the past twelve months, to leave annual inflation last month close to 10%Y/Y. Meanwhile, after a surge in spending at the start of the year and a drop in vehicle sales last month, retail sales are expected to be more subdued, with Mike Moran forecasting a rise of 0.4%M/M in February, which will principally reflect price effects. In terms of industrial production, Mike expects growth of 0.4%M/M, supported by a strong contribution from manufacturing. Other releases include the Empire Manufacturing survey (today) and Philly Fed business outlook indicators (Thursday), both for March, as well as various housing market figures for February.

BoE to raise Bank Rate for the third consecutive meeting, by 25bps to 0.75%
The BoE is also set to tighten policy further this week (Thursday) for the third consecutive meeting. The rate decision in February was a close one, with four MPC members out of nine having preferred a hike of 50bps. But the MPC signalled only that “further modest tightening in monetary policy is likely to be appropriate in the coming months”. Since then, GDP has come in well above the BoE’s expectations and inflation has also surprised significantly on the upside, with the near-term inflation outlook having worsened markedly too due to higher prices of energy, food and other commodities as well as the prospect of further supply bottlenecks. However, policy-makers will also be mindful that high inflation will significantly erode real disposable incomes, which this year look set to decline the most in more than 40 years. Consumer confidence deteriorated markedly even before Russia’s invasion of Ukraine, further suggesting that the outlook for domestic demand has weakened. And the probability of a recession sometime this year is non-negligible – indeed a contraction in Q2 now looks a decent bet. Moreover, financial market turbulence should also make some MPC members wary about tightening policy aggressively. So, while MPC members have remained largely tight-lipped since the Russian invasion, we expect the majority to want to avoid a marked shift in its policy stance and – as is currently priced by the markets – vote for a hike in Bank Rate of 25bps to 0.75%.

In terms of economic data, this week’s only new release of note from the UK will be the labour market report (due tomorrow). While employment growth is likely to have remained subdued in January as the latest wave of Covid-19 weighed on activity in the services sector, we expect the unemployment rate to nudge down 0.1ppt to 4.0% in the three months to January. And the labour market seems bound to have remained very tight, with the ratio of unemployed workers to vacancies likely to have remained near the series low reached at the end of last year. Growth in average regular wages is likely to remain below 4%Y/Y in January, suggesting that second-round effects from high inflation on pay were still limited, and meaning that real total labour earnings probably remained down more than 1.0%Y/Y.

BoJ to leave its yield curve control framework unchanged despite rising price pressures
The conclusion of the BoJ’s Policy Board meeting on Friday seems bound to be much less eventful, with its main parameters of its Yield Curve Control framework – i.e. the short-term policy rate of -0.1% and a 10Y JGB yield target of around zero percent – set to be left unchanged. With signs that price pressures are gradually broadening in Japan, and additional price pressures to come from the Ukraine conflict, the BoJ is expected to acknowledge that risks to the near-term inflation forecast are skewed to the upside. But Governor Kuroda is likely to maintain a dovish tone overall, recognising that Japanese GDP is likely to contract in Q1, emphasising that inflationary pressures remain extremely subdued compared with other G7 economies, with no signs of second-round inflationary effects, and therefore an outlook that continues to warrant an ultra-accommodative policy stance for some time to come.

In terms of data, after a quiet start to the week, Wednesday’s Reuters Tankan survey will provide the first gauge of business sentiment since Russia’s invasion. February’s goods trade report (due the same day) will likely be distorted to some extent by China’s Lunar New Year holiday last month, as well as ongoing supply-chain disruption. Machine orders data for January (Thursday) seem bound to report some payback after a solid fourth quarter, as concerns about the latest pandemic wave grew. And these same concerns will also likely be reflected in a weak outturn for tertiary activity in January (data due Friday). Likely of more interest on Friday, however, will be the latest CPI figures for February. Reflecting principally higher energy prices, headline inflation is forecast to have risen 0.4ppt to 0.9%Y/Y, which would be the highest rate since April 2019. But when excluding energy and fresh foods, core inflation is expected to have ticked only slightly higher, by 0.1ppt to a still-highly negative -1.0%Y/Y.

Euro area final inflation, IP and trade figures due; ZEW and BoF sentiment surveys of most interest
After the excitement of last week’s hawkish ECB announcements, this week will be lighter on news, including top-tier economic data, from the euro area. The Bank of France’s (BoF) latest business survey published overnight – the first to reflect conditions since the invasion of Ukraine – was on the whole broadly upbeat. Industrial production and construction activity grew stronger than had been expected in February, with consumer-facing services also benefiting from a strong rebound having been most severely hit during the latest pandemic wave at the start of the year. Services firms anticipated further recovery in March, with only modest growth in manufacturing and a slight decline in construction. While the French economy should be less exposed to the impact of the ongoing Ukraine conflict than other euro area member states, the BoF cautioned that expectations for the near-term outlook were subject to greater uncertainty, with manufacturers in particular reporting concerns about supply-chain disruption – already more than 50% of firms in the sector assessed that supply difficulties were weighing on activity. The respective share of construction firms reporting such challenges, however, fell sharply in February to 46%, the lowest since last May. Overall, the BoF estimates that GDP will hold up relatively well in the first quarter of 2022, with its current forecast for growth of ½%Q/Q.

In contrast, the ZEW investor survey for March (due tomorrow) seems bound to tally with last week’s Sentix survey to suggest a marked deterioration in perceptions of the euro area economic outlook. The euro area industrial production report for January (also tomorrow) is set to report little if any growth. In addition, the final euro area inflation report for February (Thursday) is likely to confirm the stronger-than-anticipated flash estimates, which reported a leap of 0.7ppt in the headline rate to 5.8%Y/Y and an increase of 0.4ppt in the core rate to 2.7%Y/Y, with both measures at series highs. Euro area trade data for January (Friday) will likely report a third successive trade deficit, not least due to the unfavourable shift in the terms of trade. And euro area labour cost data for Q4 (also Friday) are likely to reaffirm that second-round effects on wages from high inflation remained absent at the end of last year.

In terms of monetary policy communication, ECB President Lagarde, as well as Executive Board members Lane and Schnabel, and Banca d’Italia Governor Visco, will all speak at the annual ECB Watchers’ conference on Thursday, no doubt reiterating the messages from last week’s policy statement. In this respect, the remarks from the typically dovish Lane and Visco might be most notable, as they could illustrate the possible strength of resistance to pushing ahead with a rate hike by the end of the year if growth momentum weakens significantly.

Chinese data likely to highlight weaker activity due to latest pandemic wave
Finally, the usual monthly Chinese activity numbers for February, including retail sales, industrial production and fixed investment are due tomorrow and likely to report a notable weakening in output since the start of the year as the latest pandemic wave took its toll. As such, the PBoC might well announce further policy easing, including perhaps via a further rate cut, tomorrow. 

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