Macroeconomics: The Day Ahead for 19 March

The week’s run of major central bank meetings gets under way, with markets digesting a slightly more cautious ‘hawkish hold’ from the BoJ, and await this evening’s Fed rate decision and Powell press conference, and an expected further 100 bps rate hike to 14.25% from Brazil’s BCB. The data schedule is quite light, with the weaker than expected Japan Machinery Orders but stronger than expected Exports (suggesting that the US will again post another large trade deficit in Feb) never likely to have been a key consideration for the BoJ, while the latest UK Brightmine wage settlements (steady at 3.0% y/y) will likely steel the resolve of the BoE MPC’s doves to dissent and vote for a rate cut at tomorrow’s meeting. Ahead lies only final Eurozone CPI, which is expected to be unrevised, and perhaps more importantly Eurozone Q4 Labour Costs, while this evening brings New Zealand Q4 GDP. A busy day for ECB speakers follows Bank Indonesia’s very unsurprising decision to hold rates at 5.75%, given the turmoil in its local markets. Germany sells ‘off the run’ 30-yr Bunds, as markets wait on Friday’s Bundesrat (upper house) ratification of yesterday’s historic vote to loosen the ‘debt brake’ to fund defence and infrastructure spending. The questions now are a) what the AfD will do in terms of bringing Constitutional Court cases to block the change, and b) what the de nouveau CDU/CSU & SPD grand coalition in actual terms with this new found fiscal leeway.

** U.S.A. – Fed rate decision **

The Trump administration induced uncertainty leaves the FOMC with a particularly large messaging challenge today. The immediate focus will be on the dot plot, which most see unchanged in median terms, and its economic projections, with core PCE deflator forecasts for 2025 perhaps tweaked higher, while growth forecasts are adjusted somewhat lower, as the risk of stagflation looms. Powell will likely reprise his recent comments that the economy has been resilient, and only obliquely acknowledge the downturn in markets induced by trade wars by emphasizing that the FOMC ‘stands ready to act’ in the event of labour demand weakening, though this would be conditioned on inflation being on a sustainable path back to target. While the Fed pays more attention to the NY Fed Inflation Expectations survey (only fractionally higher), he will face questions about the very sharp rise in the Michigan survey’s 1 and 5-10 yr measures, as well as the equity market downturn. He will likely continue to emphasize that the Fed remains in ‘wait and see’ mode, understandably wanting to avoid prejudgements on what will happen to the US and global economies, above all to avoid getting into a fight with the White House at the current juncture. There is additionally some speculation that the Fed might signal a pause in its QT (balance sheet reduction) programme, but that seems unlikely at the moment, primarily to avoid leaving itself hostage to fortune on its forward policy signalling.

** Japan – BoJ decision **

– The messaging from Ueda continued to emphasize that with wages set for another large rise and inflation likely to be sustainably at or above target, the case for further rate hikes remains. However he effectively quashed speculation about the next cut coming at the BoJ’s next meeting in May, by underlining that the uncertainties due to and impact of tariff wars will need to be assessed, noting “Tariffs could directly affect the economy and inflation. They also affect sentiment and confidence such as through market moves. We need to look comprehensively at such impact.” “While there might be factors we may not find out until much later, there are factors we will know fairly soon such as changes in public sentiment. We’ll make sure not to be too behind the curve (in dealing with inflation risks).” A July or perhaps September rate hike now look to be the most likely scenario, with Ueda fiercely resisting offering any guidance on where the terminal rate might be.