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 A global rout in stock markets, currencies, commodities and bond
yields has so far defined 2016 as investors have seemingly lost
faith in central banks' abilities to boost inflation, with signs the
world economy is stalling.
Five-year inflation-linked swaps in the euro zone <EUIL5YF5Y=R>, for
example, suggest annual price growth will be just 1.4 percent even
as far out as 2021.
"Most people don't understand what has spooked markets. It's up to
economic data now to demonstrate that markets have gone overboard in
projecting very low inflation," said Jeavon Lolay, head of economics
at Lloyds Banking Group.
"One reason is probably that markets don't believe the response from
policymakers is adequate."
The Bank of Japan surprised markets late last month by cutting its
deposit rate to negative. But the impact seems limited to some
knee-jerk weakening in the Japanese yen <JPY=>.
Sweden's Riksbank also slashed its repo rate to -0.50 percent on
Thursday, partly as insurance against expectations that the European
Central Bank would ease policy in March.
Inflation data from Britain, Canada, China and the United States
next week may set the tone for the global economy.
While Reuters polls suggest at best tepid price rises, market
watchers will look at the underlying trends in inflation to gauge
whether another round of policy easing and stimulus is warranted.
Federal Reserve Chair Janet Yellen hinted this week the path to
higher interest rates in the United States may be less steep than
previously thought, given the broad market sell-off.
It's not that the outlook for inflation in developed economies has
changed dramatically in the past three months in polls conducted by
Reuters.
But a 75 percent crash in oil prices <CLc1> since mid-2014, and weak
global demand, led by China's slowing economy, have dragged down
market inflation gauges like swaps and sovereign bond yields, with
vast swathes now showing negative yields.
The yield of Germany's benchmark bunds <DE10YT=RR> has fallen over
40 basis points since January to its lowest in nearly a year, while
Tokyo's Nikkei 225 index <.N225> and the S&P 500 <.SPX> in the U.S.
have fallen over 20 percent and 10 percent respectively.
CHINA REOPENS
The start of the week will probably set the tone for markets as
trade data out of China, due on Monday, are predicted to show
exports slumped at a faster rate in January.
"The trade figures out of China will probably be diced by markets
for (their) impact on commodity prices and global growth," said
Lolay.
Inflation data for January due later in the week are likely to show
a slight uptick, although producer prices are still expected to have
fallen more than 5 percent from a year ago.
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China's markets will reopen on Monday, after a week's holiday to
mark the Lunar New Year gave its stock markets a break from the
turbulence triggered by Beijing's currency devaluation.
Policymakers have tried to instill confidence among investors
regarding their policy intentions by setting higher trading guidance
on the Chinese yuan <CNY=> in the last couple of weeks.
Still, strategists in Reuters polls predict the yuan will fall to a
multi-year low in the coming 12 months.
FED TALKS
Financial market turmoil, the weakness in China's economy and risks
to growth and inflation were among the concerns highlighted by Fed
Chair Janet Yellen earlier this week in her semi-annual testimony to
Congress.
While the path of U.S. monetary policy this year is unclear at best,
scheduled speeches of various presidents of regional Federal Reserve
banks, such as those in Philadelphia, Minneapolis, San Francisco and
Cleveland, over the week could throw some light on the thinking
among policymakers.
Cleveland Fed President Loretta Mester, currently a voting member on
U.S. monetary policy, and considered relatively hawkish, may also
give some indication of how far off she sees the next interest rate
hike.
Inflation data due next Friday are unlikely to make the picture any
clearer, although economists predict higher annual price growth in
January compared to December.
"It was striking how frequently Yellen used the prepared line
'monetary policy is not on a preset course' whenever she was asked
whether recent developments had changed the outlook," said Jim
O'Sullivan of High Frequency Economics, the most accurate forecaster
in Reuters polls last year.
"The comments further lessen the already very low likelihood that
the Fed will be tightening again as soon as the next meeting in
March."
(Editing by Ruth Pitchford)
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