Weekly wrap: Another central bank governor pledges to do “whatever it takes”

Most global equity markets enjoyed another positive week with the Dow setting a new record high while the S&P 500 saw 74 stocks set record high prices. In the US, equity markets were boosted by better-than-expected jobless claims. Weekly jobless claims fell more than expected to 332,000, while the four-week moving average dropped to the lowest level since 2008, indicating continued improvement in the labour market. Manufacturing activity rebounded in February due to a strong increase in vehicle production. According to the Federal Reserve, factory production rose by a seasonally adjusted 0.8% in February from the previous month, after falling 0.3% in January. Meanwhile, the Labor Department revealed that inflation rose by 0.7% in February, the largest amount in nearly four years, driven by rising gas prices. The yield spread between 10-year US treasuries and German bunds widened over the week due to more robust US growth. The CBOE’s Vix Index, a measure of expected equity volatility, ended the week at a six-year low. 
 

Mervyn King, governor of the Bank of England, commented that sterling was now "properly valued", reflecting fears that the rapid fall in the currency this year will raise inflation and squeeze household budgets further. At the end of the week, eurozone finance ministers met to discuss a Cyprus bailout worth up to €17bn. Cyprus’ embattled president is currently in talks with Brussels and political rivals to ease the terms of a planned levy on smaller deposit holders to help fund the bailout.
 

Japan's parliament approved Haruhiko Kuroda as Governor of the Bank of Japan. Kuroda is expected to push for monetary stimulus to boost growth and in a similar fashion to European Central Bank President Mario Draghi, he has said he will do “whatever it takes” to bring inflation up to 2%. 

Will the Fed signal a change of tack or more of the same?

It’s a relatively quiet week in the US for economic data releases. Housing starts are published on Tuesday and are forecast to increase from 890k to 915k in February. The result of the two-day Federal Open Market Committee meeting on Wednesday is expected to reveal no change to its current monetary policy stance. On Thursday, initial jobless claims are expected to move higher as the sequester (automatic budget cuts) impact takes effect. The consensus is for an increase of 4.99m existing home sales driven by a low inventory of existing properties and a demand shift towards new construction properties. After a sizeable fall to -12.5 in February, the Philadelphia Fed Index is likely to rebound to -3.5 in March due to recent strength in durable goods orders, which suggests that manufacturing activity is picking up across the country.
 

In the UK, the consumer price index is released on Tuesday and inflation is expected to nudge up from 2.7% to 2.8% year-on-year (y-o-y) in February due to rising energy costs. On Wednesday, UK unemployment data is likely to defy weak output news with the February claimant count rate expected to remain at 4.7%. The latest Bank of England’s Monetary Policy Committee Minutes should reveal how close the vote has become for an increase to the current level of quantitative easing.

Euro area purchasing manager indices for March are released on Thursday and are expected to show modest improvements but remain below the crucial 50 point level (signifying expansion). Friday’s release of the French INSEE business confidence indicator for March should show a marginal increase due to rising new car registrations. Germany’s March IFO business climate survey is expected to show a moderate improvement as the outlook for strengthening growth remains favourable.