Take Five: Putting central banks to the test

© Reuters. FILE PHOTO: Raindrops hang on a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York City, New York, U.S., October 26, 2020. REUTERS/Mike Segar

(Reuters) -Markets now appear to be gunning for a big U.S. rate hike in March, so Federal Reserve minutes and policymaker comments in the days ahead will be the key focus.

European and Japanese bond markets may keep testing policymakers' resolve to contain rising borrowing costs, UK data could shed some light on the Bank of England's next move, and shuttle diplomacy will endeavour to avert a war in Ukraine.

Here's your week ahead in markets from Ira Iosebashvili https://www.reuters.com/journalists/ira-iosebashvili in New York, Kevin Buckland https://www.reuters.com/journalists/kevin-buckland in Tokyo, Sujata Rao https://www.reuters.com/journalists/sujata-rao, Karin Strohecker https://www.reuters.com/journalists/karin-strohecker and Dhara Ranasinghe https://www.reuters.com/journalists/dhara-ranasinghe in London.

1/ MINUTE BY MINUTES

After U.S. inflation posted its biggest annual increase in 40 years https://www.reuters.com/business/us-consumer-prices-rise-strongly-january-weekly-jobless-claims-fall-2022-02-10 in January, markets are pricing in a strong chance the Fed will hike rates by half a percentage point in March.

Minutes from the Fed's January meeting, due on Wednesday, may already appear outdated. Nonetheless, edgy markets will scour them for signals on how big a move rate-setters are contemplating.

The Fed last month flagged a rates lift off for March https://www.reuters.com/business/finance/inflation-fighting-fed-likely-flag-march-interest-rate-hike-2022-01-26 and also reaffirmed bond purchases will end then. The minutes may provide a sense of when, and how quickly, the Fed might reduce its balance sheet, which roughly doubled to nearly $9 trillion during the pandemic. 

On the corporate front, chipmaker Nvidia (NASDAQ:NVDA) and retailer Walmart (NYSE:WMT) will be among those reporting earnings.

2/ WHO'S THE BOSS?

    If markets needed a reminder about who's in charge, the Bank of Japan was happy to comply, saying it would buy an unlimited https://www.reuters.com/markets/rates-bonds/boj-announces-plan-buy-unlimited-amount-10-year-jgbs-2022-02-10 amount of 10-year bonds at 0.25% and underscoring its resolve to prevent borrowing costs rising too high.

Japan's 10-year bond yield has hit a six-year peak https://www.reuters.com/markets/rates-bonds/what-boj-can-do-about-rising-japanese-bond-yields-2022-02-08 every day for a week, rising to 0.23%, just 2 bps off the BOJ's tolerance limit.

As the relentless rise in bond yields worldwide rippled out to Japan, some suspect the global trend towards monetary tightening could spur a shift at the dovish BOJ.

The bond market intervention shows that's some way off. Governor Haruhiko Kuroda https://www.reuters.com/world/asia-pacific/bojs-kuroda-says-not-debating-exit-easy-policy-mainichi-2022-02-10 continues to pledge extraordinary support for the economy, the latest reading on which is out Tuesday.

3/ ECB 'PUT'

Just as the BOJ steps in, the European Central Bank, it appears, may allow borrowing costs to rise as it focuses on inflation.

Southern European 10-year bond yield premiums over Germany are at the widest since mid-2020; Italy's spread is 20 bps wider from levels seen before the hawkish ECB pivot on Feb. 3 https://www.reuters.com/business/ecb-seen-hold-may-acknowledge-inflation-risks-2022-02-02.

Yes, the periphery is in a stronger position https://www.reuters.com/article/europe-ratings-sp/italy-greece-have-buffers-from-rising-rates-sp-global-analyst-idUKL8N2UH09S to cope, thanks to low debt refinancing costs and the EU recovery fund.

But a potentially faster-than-anticipated unwinding of the stimulus that has long buffered the periphery is a big deal, and the ECB 'put' could be put to the test https://www.reuters.com/world/europe/euro-zone-bond-markets-ecb-put-is-some-way-off-2022-02-10.

The term, normally used to describe the Fed's backstop for stocks, refers to the ECB's willingness to tolerate rising yields that could tighten financing conditions and raise fragmentation risks. Markets are right to feel nervous.

4/ BIG DATA

It's a big data week in Britain with latest employment figures out Tuesday, inflation data on Wednesday and retail sales Friday.

They're in focus because the Bank of England just delivered back-to-back rate rises https://www.reuters.com/business/bank-england-hikes-rates-clamour-contain-spiralling-inflation-2022-02-03 for the first time since 2004, trebled wage growth forecasts and predicted inflation to peak above 7%. Markets price another 130 basis points in hikes by year-end.

Data last month showed a 4.1% unemployment rate https://www.reuters.com/world/uk/uk-employers-add-jobs-dec-unemployment-falls-2022-01-18 for the three months to November, the lowest since June 2020; new hirings surged by a record amount in December.

Consumer prices, meanwhile, accelerated in December to near 30-year highs https://www.reuters.com/world/uk/uk-inflation-rises-highest-since-march-1992-2022-01-19 of 5.4% and may only peak in April when households face energy bill hikes of up to 50%.

While December shopping was hit https://www.reuters.com/business/retail-consumer/uk-retail-sales-slumped-by-37-december-ons-2022-01-21 by Omicron-linked curbs, latest retail sales may also show consumers' mood https://www.reuters.com/business/uk-consumers-take-fright-rising-inflation-rates-gfk-2022-01-21 being soured by inflation, lofty energy bills, higher rates and tax hikes.

5/ TROOPS, TALKS AND TABLES

Shuttle diplomacy https://www.reuters.com/world/europe/kremlin-denies-putin-told-macron-there-will-be-no-new-manoeuvres-near-ukraine-2022-02-08 is at fever pitch to prevent tensions between Moscow and the West tipping over https://www.reuters.com/article/us-ukraine-crisis-britain-lavrov-idUSKBN2KF1K2 into a full-blown conflict https://www.reuters.com/world/europe/russian-attack-ukraine-possible-any-day-diplomacy-still-an-option-white-house-2022-02-06 around Ukraine.

After French President Emmanuel Macron's visit, German Chancellor Olaf Scholz will see Ukraine's President Volodymyr Zelenskiy on Monday, before heading to Moscow to meet Russia's Vladimir Putin. Poland's foreign minister is due in Moscow too, and NATO holds a defence ministers summit in Brussels Wednesday.

While Russian troop build-up near Ukraine's border continues https://www.reuters.com/world/europe/wrapup-1-russia-starts-belarus-military-drills-amid-new-diplomacy-ukraine-2022-02-10 and Western powers send military to Europe's eastern fringes and ready sanctions on Moscow, markets seem to be focusing on other issues such as central banks and inflation.

The coming days may show whether the flurry of diplomacy improves international ties and keeps Russian energy https://www.reuters.com/world/europe/germany-ready-pay-high-price-defend-values-baerbock-moscow-2022-01-18flowing into Europe.