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Last week witnessed a continued surge in European stock markets, with the Euro Stoxx 50 index surpassing the historic milestone of 5,000 points for the first time. However, Wall Street’s rally lost steam, concluding the week on a negative note primarily attributed to a resurgence in bond yields. 

Looking Ahead:  Central Banks Set to Determine Interest Rates

Global inflation may face risks of re-elevating due to signs of a rebound in energy prices, typically in crude oil. This resurgence poses a challenge to central banks’ outlooks regarding their policy trajectories, especially considering that many had previously signalled intentions to lower interest rates later in the year.

This week is crucial for the market sentiment. Major central banks,  including the US Federal Reserve (Fed), the Bank of England (BOE), the Swiss National Bank (SNB), the Bank of Japan (BOJ), and the Reserve Bank of Australia (RBA), are set to decide on their interest rates and offer clues for future policy paths. 

The US Fed is the most influential bank leading policy directions, and the BOJ’s rate decision can also be critical as it is widely expected to terminate its negative rate either at this meeting or the forthcoming one in April. Furthermore, the BOE, the SNB and RBA’s policy meetings are seen as key indicators for their regional market trajectory.

The EU

It is a quieter week on the economic front for Europe compared with other major economies. The focus in Europe will be its final February Consumer Price Index (CPI). Both the estimated February headline and core CPI came in higher than expected, printing at 2.6% and 3.1% year-on-year respectively. 

However, the data did not weaken the expectations that the ECB will commence rate cuts in June. The forthcoming final CPI figure is poised to provide additional insights into the region’s inflation trajectory, thus shaping future market trends.

Additionally, major EU economies, including France and Germany, are set to report their estimated manufacturing and services PMIs for March. Notably, European manufacturing activities exhibited signs of recovery from January, attributed to the easing inflationary pressures and a deceleration in rate hikes. 

However, Germany, the EU’s leading economy, remained the primary laggard within the group, with its manufacturing PMI contracting for the 20th consecutive month in February. Meanwhile, milder contractions were seen in the Netherlands, Italy, and France. The uneven recovery in the eurozone may further encourage the ECB to maintain an accommodative stance in its monetary policy, thus continuing to bolster bullish sentiment in the market.

The US

The Fed’s monetary policy meeting is the most influential event for the global markets as its decision is seen as a leading indicator of the global economy. Wall Street’s upside momentum showed exhaustion, with the S&P 500 finishing in the red for the second straight week. 

The Fed is expected to hold its interest rate at between 5.25% and 5.50% but its stance on further rate path would significantly impact the global markets. A more hawkish than expected tone could lead to a further sell-off on Wall Street, particularly in the tech sector. Expectations of the interest rate staying “higher for longer” are likely to bolster the US dollar again.

The country is also poised to release its flash manufacturing and service Purchasing Managers’ Index (PMIs) for March this week, offering insights into its economic activities. In contrast to its European counterparts, the US economy exhibits greater resilience, indicating a potential “soft landing”, with both indicators remaining in expansionary territory.

The UK

The UK’s stock market has been lagging behind global peers, primarily due to recent pressure on mining stocks stemming from a downturn in critical minerals prices. Despite this, the country’s GDP growth rebounded after experiencing a technical recession in the second half of 2023. 

This week, the February CPI data is key to determining the local market’s sentiment. Inflation is expected to decline significantly to 3.5% year on year from 4% in the prior month, which may further prompt the Bank of England to commence rate cuts sometime this year. However, the BOE is likely to keep the interest rate on hold at 5.25% this week.

Switzerland

The SNB is forecasted to keep its policy rate at 1.75% at the upcoming meeting as the country’s inflation printed at 1.3% year on year in January. This figure, considerably lower than expected and marking a significant decrease from the previous month’s 1.7%, has led economists to expect that the bank might initiate interest rate cuts as early as June. This timeframe is earlier than previously projected, which had suggested September for such an action.

Japan

The Japanese Yen significantly strengthened in the first half of March, thanks to the bets on the BOJ’s pivot on its monetary policy. 

Since implementing negative interest rates in 2016, the BOJ has maintained an ultra-loose stance. However, the resultant sharp devaluation of the Yen has led to increased inflationary pressures, thereby constraining household spending power. Despite achieving an all-time high in the stock market, Japan’s economy saw minimal growth in 2023, largely attributed to declines in both real wages and real consumption. 

Market expectations strongly suggest that the BOJ will terminate its negative interest rate policy either at the March or April meeting. Such a move could further bolster the Yen’s exchange rate against all other major currencies.

Australia

The Australian stock markets were under pressure due to declining iron ore prices as big miners’ stocks, such as BHP and RIO, experienced downtrends. The RBA’s decision will be a key driver of the local equities. The bank may keep its interest rate on hold at 4.35% for the third time in a row, driven by cooling inflation in the country. However, its tone on the further rate path will determine the market sentiment. 

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With diminishing consumer purchasing power and easing inflationary pressures, there’s a possibility the RBA could adopt a more dovish stance. Such a shift is typically viewed as a bullish factor for local stock markets but may exert downward pressure on the Australian dollar.