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Waiting for Powell, Draghi, Kuroda

With the US / North Korea summit out of the way market attention turns to the interest rate decisions from three key central banks due over the rest of the week. The overnight release of US inflation data points to a hike early on Thursday morning. The US dollar strengthened and the Nasdaq hit a new all-time high. However Asia Pacific investors could be cautious as they await the view from the keepers of monetary policy.

The US Federal Reserve, the Bank of Japan and the European Central Bank will all decide in the coming days. The Fed is almost certain to hike with headline inflation running at an annual rate of 2.8%, and core inflation at 2.2%. The accompanying statement could be more influential. Market pricing indicates traders are split between a total of three or four interest rate rises this year, and any shift in this perception will echo through global markets.

Similarly the ECB’s statement is key. There is almost no chance of a lift this week despite improving economic data. The ECB is committed to winding in its stimulatory bond purchase program before adjusting rates. Once again markets doubt the bank’s stated intention to start withdrawing by the end of the year, and a persuasive statement on Thursday night may move markets.

Traders are pricing an outside chance (12%) of a move from the Bank of Japan. The unusual targeting of ten year bond rates by the BoJ is vulnerable to the higher longer term interest rates around the world. The Friday afternoon announcement therefore has more potential to surprise markets.

Regional trading today could see lower volumes today in a repeat of yesterday’s slow action. Modest pressure on base metals may subdue sentiment although a lift in West Texas crude oil prices may provide some offset. A round trip for indices would not surprise, and a possible scenario is opening weakness followed by a drift back towards unchanged for the day.

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