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Week Ahead: Packed Week with Fed, BOE, BOJ and Australian Jobs

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Fundamental analysis of Forex market

With the central bank meetings this week, traders need to be on the lookout for hints as to when a change in monetary policy may be coming.

After the BOC and the ECB meetings last week, this week brings a triple whammy of the Fed, BOE, and BOJ.  Last week, the BOC left monetary policy unchanged, however the ECB is feeling the pressure of rising yields and inflation expectations and said they will increase the pace of bond purchases significantly.  With the central bank meetings this week, traders need to be on the lookout for any hints as to when a change in monetary policy may be coming.  The US stimulus bill has been passed and signed.   What will the implications be?  With the vaccine rollout continuing, how much longer will the coronavirus be around? And it’s a quiet earnings week, so the focus will be on the economic data, particularly the Australian job report.  Will the trend of stronger jobs continue?

Central Bank meetings

The Bank of Canada met last week and left rates unchanged at a record low 0.25%, which they said will remain there until economic slack is absorbed.  They don’t expect that to happen until 2023.  In addition, the BOC left their bond purchases unchanged at 4 billion Canadian dollars a week.  The stellar Canadian employment data, which showed 259,200 jobs were added to the economy in February, supports the BOC’s view that Q1 will be stronger than expected.

The European Central Bank meeting outcome was a bit different.  European data has been mixed during Q1, most notably manufacturing data outweighing services data by a significant amount.  Inflation expectations and rising yields have been weighing on the ECB. The ECB needs to be more aggressive than many other central banks, however with the key interest rates already at minus 0.5%, its difficult for them to adjust rates.  Under terms of the Pandemic Emergency Purchase Program (PEPP), the ECB has the flexibility to buy up to 1.85 trillion Euros worth of bonds as they see fit.  Given the recent rise in rates, the ECB said they would increase their bond buying significantly in order to keep rates low.  This differs from the strategy of the Fed, which is committed to buying $80 billion of Treasuries and $40 billion of bonds per month.

Speaking of the Fed,  Powell and other central bank members have spoken at length recently about how they view the current rise in yields as temporary and the recent rise in inflation expectations as transitory.  The FOMC meets this week, and we’ll have to see if the Fed sticks to its story or if the rise in yields to new post pandemic highs caused them to change their tune.  Read my colleague Matt Weller’s FOMC meeting preview: Will inflation spool the Fed?

The Bank of England also meets this week.  The major take away from the meeting in January was that although the BOE had been discussing negative interest rates, it did not mean to imply that they were actually going to move to negative territory.  And with that, GBP went bid.  With the UK in the process of reopening after the lockdown, the positive rollout of the vaccine, and the recent rise in yields, traders will be watching to see if the central bank is ready to discuss tapering or if they will remain on hold and wait for further evidence of a recovery.

Finally, the big news from Japan last week was that the Tokyo Olympics will be held this summer as planned, however they will not allow international spectators. Recently, Japan has reopened many of the Prefectures which were in State of Emergency.  However, Tokyo remains under restrictions until March 21st.  The Bank of Japan meets on Friday.  Last week, the BOJ was said to seek freer yield fluctuations after a review this week.  Traders are anxious to see the options which the BOJ lays out.  The current range is 20 bps on either side of the zero target on the 10-year JBG.

US Stimulus

The $1.9 trillion stimulus was signed by US President Joe Biden on Thursday.  The stimulus package includes $1,400 payments for those with gross incomes up to $75,000 and $150,000 for married couples.  In addition to the $600 stimulus payments from the Trump administration, the sum equals the amount Joe Biden was promising during his campaign, $2,000.  People may begin receiving stimulus checks as early as this weekend.  Will this cause inflation in the US and possibly around the world?  Stock markets sure seem to think so.   Stock indices have been pricing the stimulus package into the markets for months.  Also, now that the package is passed, how will the Fed react?  Fiscal stimulus in the US is done.  Traders will have need to determine if this is a “Buy the rumor, sell the fact” trade.

Coronavirus and vaccine rollout continue

Coronavirus cases in the US continue to fall.  More importantly, the number of hospitalizations continue to drop.  However, is it just a matter of time before the variants catch up in the US or will the vaccine immunizations outpace the spread of the variants.  Germany has declared that the country is in the “third-wave” of the coronavirus, this time due to the UK variant making its way through the country.  In addition, Italy is set add new restrictions to sections of the country and go into lockdown over Easter weekend, April 3rd-5th.  Brazil recently surpassed 2,000 daily deaths, and the vaccine rollout is slow.  How much ammunition do these countries have left to starve off these conditions?  Will it reach the same level in the US?  Will other countries need to re-enter lockdowns due to variants?

Earnings

It’s a light week for earnings, however there are a few to take note of.  They are as follows: CRWD, NKE, CAN, FDX

Economic data

In addition to the major central bank meetings this week, there are a few notable economic data results that traders should be watching, including a China dump on Monday, US retail sales on Wednesday, and the Australian Employment Change for February on Thursday.  You can find our complete economic calendar here.  Other important data releases this week are as follows:

Monday

  • New Zealand: Services NZ PSI (FEB)
  • Australia: RBA Gov Lowe Speech
  • China: House Price Index (FEB)
  • China: Industrial Production (JAN-FEB)
  • China: Retail Sales (JAN-FEB)
  • China: Unemployment Rate (JAN-FEB)
  • Canada: Housing Starts (FEB)
  • Canada: Manufacturing Sales (JAN)

Tuesday

  • New Zealand: Westpac Consumer Confidence (Q1)
  • Australia: RBA Meeting Minutes
  • Australia: House Price Index (Q4)
  • Japan: Industrial Production Final (JAN)
  • Germany: ZEW Economic Sentiment Index (MAR)
  • US: Retail Sales (FEB)
  • US: Industrial Production (FEB)
  • US: Manufacturing Production (FEB)
  • US: NAHB Housing Price Index (MAR)

Wednesday

  • Australia: RBA Kent Speech
  • EU: Inflation Rate Final (FEB)
  • Canada: Inflation Rate (FEB)
  • US: Housing Starts (FEB)
  • US: Fed Interest Rate Decision
  • Crude Inventories

Thursday

  • New Zealand GDP Growth Rate (Q4)
  • Australia: Employment Change (FEB)
  • EU: Trade Balance (JAN)
  • UK: BOE Interest Rate Decision
  • Canada: New Housing Price Index (FEB)
  • US: Philadelphia Fed Manufacturing Index (MAR)

Friday

  • Japan: Inflation Rate (FEB)
  • Australia: Retail Sales Prel (FEB)
  • Japan: BOJ Interest Rate Decision
  • Germany: PPI (FEB)
  • Canada: Retail Sales (JAN)

Chart of the Week: Nasdaq 100 vs Russell 2000

Source: Tradingview, FOREX.com

For the week, the NASDAQ 100 finished up 2.07% and the Russell 2000 finished the up 7.32%.  However, the Russell 2000 has been outpacing the NASDAQ 100 since September 3rd, 2020. The ratio to the two indexes has been moving lower in an orderly channel formation as funds more out of the “stay at home” NASDAQ 100 stocks and into the “go out” Russell 2000 stocks. When the ratio gets too close to the top trendline, the NASDAQ 100 is advancing more (or falling less) than the Russell 2000.  When the ratio gets too close to the bottom trendline, the Russell 2000 is outperforming the NASDAQ 100.  However, although the ratio has been moving lower for the last 6 months, notice the large bearish engulfing candle on Friday.  If it continues towards the bottom trendline near 5.35, watch to see if the ratio reverses.  This ratio can be viewed as a confidence factor as to how the recovery is going.  If the ratio breaks lower below the range, the Fed may want to consider tapering sooner than later!

With three major central bank meetings and a host of economic data, this is sure to be a busy week for the markets. Watch yields as well, if they continue to rise, central banks may have to respond to, or at least address, the issue.

One more thing to note: US turns clocks forward this weekend!!

Have a great weekend and please remember to always wash your hands!