Central banks week: Expected to stay on pause but viewpoints vary on what comes next and when

Outlook: This week three top central banks hold policy meetings, the Fed, the ECB and the BoE, plus the Swiss National Bank and the Norwegian central bank (which is the only central bank facing a second month of rising inflation instead of a decline).

All are expected to stay on pause but viewpoints vary on what comes next and when. You can bet your bottom dollar they are speaking with one another. The FT’s top story is the big three “pushing back” at markets over-eager to get rates cuts before the evidence is in. “… all three… signaled they want clearer evidence of weakening labour markets before cutting rates.”

In the US, we have plenty of data to justify some hawkish noises even if the Fed stays paused. As of late Friday, the CME Fed funds futures had a 46% probability of a cut at the March FOMC and almost 80% of a cut in May. Plenty of observers think this is still nuts. The FT says Mr. Powell is “under pressure” to set out a plan for US rates. Tsk, tsk, FT. Central banks never disclose anything that can be named a ”plan.” Instead they tapdance between “data-dependency” and “transparency,” meaning not shocking the delicate market makers with any surprises.

And traders will position themselves, appropriately or not, to the CPI tomorrow. The last reading was 3.2% with services ex energy at 5.5%. We note food at home is nice (2.4%) but shelter is still high at 6.7%. 

Tomorrow’s CPI is expected at 3.1%, but core at the same 4.0%. Don’t forget that CPI is not the version the Fed prefers. Assuming the public has any clue whatever about inflation—most seem to think it’s still running at super-high rates—the University of Michigan survey on Friday showed the 1-year expectation down to 3.1% and the 5-year below 3%. We get the NY Fed version later today.

Of greater interest will be the dot-plot and other economic projections from the central banks. The retreat in the US is imagined to be bigger and maybe sooner than elsewhere, and yet still leaving the US with higher note and bond yields, except for the UK.

We have a case of odd behavior in the dollar/yen, which has reversed the premature expectation of an end to zero rates by the BoJ and in double-time. Dollar/yen hit a low of 141.71 last week but has risen to a high of 146.46 and nearly a 50% retracement of the original move. The chart has a timeframe of 8 hours. This kind of price move is extremely rare and subtracts something from respect for Mr. Ueda, who is the guilty party for even mentioning such a thing. Some analysts can be forgiven for thinking there is still something to it and it will happen once embarrassment wears off, if not next week.  Or maybe not. Bloomberg reports that “Bank of Japan officials have yet to see enough evidence of wage growth that would support sustainable inflation” and so whatever the inflation data, the BoJ is watching wages alone. Ironic, now that the Fed is giving up wages as the central inflation driver.

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