Hold The Horses

By Rabobank

There are five G10 central bank meetings scheduled this week and not a single policy move is expected between them. That said, the signalling of policymakers will be crucial. For each of the BoJ, Fed, BoC, ECB and the BoE, the market will be watching to see how rate setters are gauging the two sided the risks to growth and inflation implied by the Iran war. It remains Rabo’s view that the Fed will likely cut rates again this year. This outcome may have been made a little easier by the weekend announcement from Senator Tillis regarding President Trump’s nominee for the next Fed Chair. Following Friday’s news that the Department of Justice would drop a criminal investigation into Fed Chair Powell, related to renovations at the Federal Reserve, Tillis has removed his objection to nominee Warsh facing a vote in the Senate. While Trump may be a step closer to seeing his choice of candidate in the position of Fed Chair, US treasury yields have ticked higher this morning with the market still focused on inflation risks in the absence of little concrete news regarding a peace deal in the Middle East.

There may not have been any recent peace talks but Iran’s Foreign Minister Araqchi has had a busy few days. Following trips to Pakistan and Oman to talk with peace negotiators over the weekend, he has now travelled to Russia in a bid to ratchet up support. Having cancelled a trip by US negotiators Witkoff and Kushner to Pakistan, Trump made it clear that Iran could use the telephone to make a deal – Iran had made clear that talks would be indirect. Trump also reiterated the US’s condition that Iran must not be able to obtain a nuclear weapon. For its part, Iran is maintaining that it will not re-enter talks with the US while its navy is blocking the Strait of Hormuz.

On disappointment over the lack of fresh peace talks, Brent crude spent the first few hours of the European session edging higher before reversing those gains. While US stock market indices closed mixed on Friday, it hasn’t taken much for equity markets to revert to their ‘glass half full’ approach to the global outlook. Despite the very real risks to the global economy implied by higher inflation, much of this optimism has been driven by a solid set of Q1 earnings reported by corporate America. This week there will be no escaping the focus on the tech sector with results due for five of the huge US hyper-scalers.

Week ahead 

The BoJ will be the first of this week’s G10 central banks to announce its policy decision which will come tomorrow. In contrast to the other four central banks that meet this week, the market had been debating the risks of an April rate hike from the BoJ since the start of the year. BoJ rate hike risk has now been shifted to June. Whether that risk shifts again will be dependent on the tone of rate setters at this week’s meeting. The absence of hawkish rhetoric is likely to place fresh upside pressure on USD/JPY which may force the MoF to step up its push back against JPY weakness and a potential break beyond the psychologically important USD/JPY160.00 level.

Aside from the policy guidance offered by the Fed, the market will be watching on Wednesday to see if outgoing Chair Powell is intending to retain his seat in the FOMC after his term as Chair concludes. Almost all of Powell’s predecessors have decided to leave when their term as chair ends, though technically Powell could stay until 2028. If he leaves, Trump will have another seat to fill, which the market could anticipate as having a slightly dovish implication for the FOMC. There is less scope for drama at the BoC. The market is currently priced for slightly higher BoC policy rates on a 6-month view, though the swing in market expectations regarding policy rates in Canada falls a long way short of that seen in the UK since the start of last month.

Ahead of the start of the Iran war, the market had been confident of two more rate cuts from the BoE this year as growing excess capacity in the UK slowed inflation potential. At one point last month, this had swung to expectations of as many as four rate hikes, guided by the UK’s recent poor experience with sticky inflation. These excessive rate hike expectations have now moderated. However, it is Rabo’s view that there will still likely be one rate hike this year in order to demonstrate vigilance. For the ECB, we also see the risk that policy makers will opt for some tightening in the face of the inflation shock, though we have moved our forecast to June. Clearly by June, policymakers will be much wiser regarding the duration of the war and the extent to both the potential impact on their respective economies.

While the question of how long the Strait of Hormuz will be closed continues to limit focus on economic data, there are some interesting releases this week. These include Australian Q1 CPI inflation data, which could dictate the next policy action of one of the most hawkish G10 central banks. US March personal income and spending data will also be released this week in addition to US Q1 GDP. In Europe, GDP and labour data are due.