by Bill O’Grady and Kaisa Stucke
[Posted: 9:30 AM EST] It was a mostly quiet night in front of the ECB decision tomorrow. Market expectations are optimistic that Draghi will come through with some sort of stimulus. If the EUR fails to weaken after tomorrow’s meeting, it may signal that the ECB is mostly out of policy tools to address the lack of Eurozone inflation. We look for a deeper dive into negative territory for policy rates, and either a lengthening of QE or a boost to the levels of buying, or both.
Meanwhile, in Japan, reports suggest that the BOJ will likely hold policy steady next week when it meets. Its surprise move to take rates into negative territory has not had the desired impact; the JPY has continued to strengthen and the FT reports that trade unions in Japan’s financial sector are giving up demands for higher wages this year. According to the report, the adverse impact of negative rates on banks has led the unions to abandon any efforts to boost wages on the assumption that banks won’t be able to afford a wage hike. Negative policy rates continue to be a controversial issue. Japan’s experience thus far has been mostly disappointing.
On the topic of central banks, the WSJ’s Jon Hilsenrath has a column today discussing next week’s FOMC meeting. Although it is widely assumed that there will be no policy action taken, Yellen will probably try to signal that a potential hike is on the table for April or June. Since there is little chance that they will move at a meeting without a press conference, June is the most likely time to take rates higher. Probably the closest watched factor will be the dots chart. In looking at the voting roster, based on recent comments, we would expect steady policy at next week’s meeting with one likely dissenter (KC FRB President George) and an outside chance of another (Cleveland FRB President Mester). We expect all the governors to vote for steady policy. Two dissents would probably not be taken well by the markets as it increases the odds of further rate hikes; one dissent will likely be ignored.
Finally, in Yemen, there is some movement on the war front. Reuters is reporting that the Saudis and Houthis, the primary combatants in the Yemen conflict, have begun talks to end the war. A delegation representing the Houthis has traveled to neighboring Saudi Arabia to begin discussions. Iran, who backs the Houthis, has made a veiled offer to send military advisors to the group, which will raise concerns in Riyadh. If a peace deal can be reached it will reduce tensions in the region and reduce some of Saudi Arabia’s expenses. We would expect Iran to try to undermine the talks to keep the conflict alive.