Weekly focus – Central banks remain in standby mode
The global Covid-19 situation remains difficult. New coronavirus cases around the world rose for a ninth straight week from a record 5.7 million, as a 52% increase in India offset declines in most regions. Nonetheless, on a positive note, the vaccination campaign in Europe is picking up steam and the US has softened its stance on vaccine nationalism, signaling its willingness to export their 60 million doses of AstraZeneca, likely to India. .
A series of central bank meetings this week brought little change on the political front. Despite the fed becoming more bullish on the economy, Fed Chairman Powell reiterated it was too early to talk about cuts. Based on our very positive US macroeconomic outlook, we continue to see the Fed moving in a more hawkish direction later this year when more positive US macroeconomic data begins to arrive (see Fed Monitor: Review – “Now is not the time to start talking about tapering”, April 28). US rates resumed their hike this week after the recent consolidation, while the mood in global equity markets remained positive, helped by strong earnings seasons. EUR / USD rose above 1.21 following dovish comments from the Fed.
The Riksbank didn’t shake the boat either. He kept the repo rate trajectory unchanged at zero, left the door open to turn negative, and reiterated that the SEK will only appreciate slowly from here, actually increasing the trajectory, indicating a pace of appreciation a little slower, see Flash Commentary Riksbank April 2021, April 27, 2021.
The Bank of Japan (BoJ) kept its QQE with yield curve control unchanged with the short-term interest rate target at -0.1% and for 10-year bond yields around 0%. The BoJ has also released a new outlook report, in which 2023 now marks another year without meeting the 2% inflation target and the forecast for 2021 has been revised down following further closures in Japan . FX’s reaction to the move was subdued, but as the BoJ added another year without hitting the inflation target to its outlook, the yen weakened after four weeks of pure strengthening.
We dove deep into German politics before the federal election on September 26. More importantly, the Green Party is likely to be the kingmaker in any future government coalition, opening up the possibility of a more relaxed fiscal stance down the line. However, the debt brake will always limit expansionary fiscal policies. For more details see Research Germany: End of “Merkel era” leaves German politics in uncharted territory, April 27.
Next week April’s US jobs report and ISM manufacturing / services are due for release and we expect solid readings on both. A quieter week awaits us in the eurozone, where German industrial production figures for March could surprise on the upside given optimistic business surveys and lackluster hard data so far in the first quarter. The Bank of England (BoE) meeting will not bring any significant policy changes in our view, as the BoE remains in a wait-and-see mode (although updated forecasts on the economy and inflation are released) . Instead, it’s worth keeping an eye out for the Scottish elections (as well as the UK local elections) on Thursday which could have significant implications for the likelihood of another Scottish independence referendum and trigger some GBP volatility. In China, we look forward to April’s Caixin PMI, which could rebound due to strong US exports.