A Combo of RBA, BOC, BOJ & Powell

RBA delivers “dovish hike”, as inflation may have peaked. The Reserve Bank of Australia hiked its cash rate by 25 bp to 3.6% – the highest since May 2012. The move was widely expected and Governor Lowe delivered a dovish leaning assessment, suggesting that inflation may have peaked. Lowe said that in assessing “when and how much further” rates have to rise, the RBA will pay close attention to incoming data. At the same time, he said that “the monthly CPI indicator suggests that inflation has peaked”, adding that “recent data suggest a lower risk of a cycle in which prices and wages chase each other”. Based on this the RBA seems to be approaching peak rates and markets took the comments as a dovish signal. The 10-year bond rate dropped -8.2 bp in the wake of the announcement and the AUD sold off.

Tomorrow, the BOC meets. Governor Macklem already announced a “conditional pause” in January after downshifting to a 25 bp increase to bring the rate up to 4.50%, the highest since 2007. Recent data have been mixed with inflation still elevated but with some slowing in price pressures, along with some signs of a resurgence in growth. The employment and wage numbers Friday will be anxiously awaited for more clues on the economy and how they fit into the inflation picture. Other reports that will add to the BoC’s outlook on the rate path include the IVEY PMI, trade (Wednesday), and capacity utilization (Friday).

However the FED remains in the spotlight, with Fed Chair Powell’s Monetary Policy Report to Congress, first to the Senate Banking Committee today, then to the House Finance Committee tomorrow, rather than the BOC and BOJ on Friday. 

Fed funds futures were little changed as the market awaits Fed Chair Powell. Implied rates remain priced for a 25 bp hike at the March 21-22 FOMC meeting to a 4.875% mid-rate, with about 25% to 30% chance for a 50 bp boost. We believe that a change of gears from the 25 bp increase on February 1 is unlikely. The futures continue to point to a 5.4% peak rate in July. Importantly, the market is showing a 5.4% rate holding through November, reflecting the Fed’s “higher for longer” mantra. We do not expect any revelations from the Chair, especially as he will not have key data nonfarm payrolls, with the report coming out Friday, nor CPI (due March 14). We look for him to stress there is more work to be done and that rate cuts are not seen this year. He will want to leave all options open and not front-run the FOMC decision.

In Japan, the BOJ meeting (Thursday, Friday) takes center stage. This will be the last meeting under the helm of Governor Kuroda. No policy changes are expected at this meeting, with the policy rate held at -0.1% and YCC at 0.5%. And we do not expect any policy signals from Kuroda in order to not encumber the next policy chief, mostly likely Kazuo Ueda, who has already indicated in nomination hearings that he would maintain the accommodative stance. However, inflation has risen with National CPI at a 4% rate. And with the economy picking up too, a policy shift could be seen later this year. Economic releases include the current account (Wednesday), GDP (Thursday), and household spending and PPI (Friday).

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Andria Pichidi

Market Analyst

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