The March Federal Open Market Committee minutes release yesterday sent ripples through the currency market. Several members of the committee pointed to short-term catalysts as the reason for recent weak activity data, and advocated tightening in June. Critically, the tone suggests that as tightening commences, explicit forward guidance will become a thing of the past. For investors, this reinforcement of market consensus for a mid-year rate hike makes it more likely that the U.S. dollar will resume its position of strength versus currencies of nations whose central banks keep the printing presses in motion.
Mylan to acquire Perrigo. Suburban Pittsburgh–headquartered generic drug manufacturer Mylan has agreed to acquire Dublin–based Perrigo for $29 billion. The deal, following Mylan’s purchase of Abbott Laboratories’ non-U.S. operations, will help Mylan expand its European footprint.
Greece pays IMF. The Greek government advanced the roughly $500 million payment due to the International Monetary Fund today as negotiations with creditors continue to drag on. With the nation’s coffers rapidly draining, a resolution allowing more funds to be advanced at the April 24 Eurogroup meeting is growing ever more critical for Greece.
U.K. trade deficit expands. U.K. February trade data released today included an increase in the deficit for goods and services to £2.9 billion ($4.3 billion), compared to £1.5 billion in January. One primary driver of the expanding shortfall was weak exports for goods, driven in part by slackening U.S. demand.
U.S. data on deck. Major macro announcements in the U.S. today include February wholesale inventories and initial weekly jobless claims. Consensus forecasts for wholesale trade data call for a reversion of the sharp mismatch between inventories and sales data registered in January.
Satyam founder convicted. In India’s largest corporate fraud case ever, Satyam Computer Services founder and former head Ramalinga Raju was found guilty of multiple charges today and sentenced to seven years in prison. The court in Hyderabad also found Raju’s brother guilty of concocting false financials, contributing to Satyam’s collapse.
Bank of England keeps rates steady. The Bank of England kept benchmark lending rates at record lows during today’s monthly monetary policy meeting. While U.K. growth and activity measures have risen in recent quarters, the potential deflationary impact of low commodity costs has eased pressure to begin tightening in the near term.
Portfolio Perspective: What’s Likely In Store for the Bank of Japan — Kyohei Morita, Barclays
The Bank of Japan wrapped up its two-day monetary policy meeting with a decision to leave rates unchanged. We retain our baseline forecast of further qualitative easing at the July meeting, but now expect the Bank of Japan to cut interest on excess reserves to 0.05 percent, in addition to increasing its equity-linked exchange-traded fund purchases.
Two data points important to the near-term outlook for monetary policy are the consumer price index and the June Tankan, the Bank of Japan’s short-term economic survey of domestic business. In terms of the former, the Bank of Japan believes core CPI inflation “is expected to be about 0 percent for the time being,” but does not appear to anticipate a move into negative territory. We expect such inflation to strengthen again in March, but to slow abruptly in May and enter negative territory in either June or July and remain there until around November.
With regard to the Tankan, inflation expectations appear relatively resilient at this stage. Given the rapidly widening margin of year-over-year decline in capital good price index-based prices of domestic consumer durables (excluding VAT effect), the “inflation outlook of enterprises” could still come down in the June Tankan, to be released July 2. The July 14-15 meeting is thus the most likely occasion for the Bank of Japan to recognize the downside risk to inflation expectations.
Kyohei Morita is chief economist for Barclays Securities Japan in Tokyo.
