RBC Capital Markets

Week ahead: The Bank of Canada (see CAD) is envisaged to stand pat on its policy settings this week. The ECB meeting (see EUR) will give the bank a chance to respond further to rising bond yields, but any new policy announcements is unlikely. The data calendar has US CPI (see USD), UK January GDP (see GBP), China credit & financing (see CNY), and Canada employment report among others.

USD: US CPI inflation (Wednesday) is expected to be boosted by a sharp rise in gasoline prices in February, and we forecast a firm 0.5% m/m advance in headline CPI as a result, translating into 1.8% y/y inflation. Core CPI however should be more subdued at 0.2% m/m. We are likely still a few months away from a sustained rise in the inflation profile, but it will come.

GBP: We forecast UK January GDP (Friday) falling 4.7% m/m due to the lockdown, which has had a much larger impact on economic activity than the one in November.

EUR: The ECB meeting (Thursday) is likely to see policymakers emphasise their commitment to an accommodative policy setting for a long period of time, at least verbally. Whether the bank will have deployed its QE programme in the interim to quell rising bond yields remains to be seen. In this context, it would be important to learn more about the ECB’s initiative to develop new gauges for ‘financial conditions’ and how those have evolved lately. Germany final CPI is due on Friday.

CNY: China February credit and financing data is scheduled to be released sometime this week. It is envisaged to show a sharp drop because of the New Year holiday, but the extent will still be closely watched, especially following the policy shift back towards deleveraging.

NOK: Norway January GDP (Tuesday) and Norway CPI (Wednesday) are on the calendar.

CAD: RBC Economics expects no policy changes at Wednesday’s statement-only BoC meeting. This means no change in the overnight rate (0.25%), GoC bond purchases (C$4bn/week) and forward guidance time frame. The BoC is very likely to acknowledge stronger growth in Q4 and January, though it may temper this given continued concerns about labour market scarring. Improved vaccine distribution of late is likely to reinforce the BoC’s (and our own) expectation for accelerating growth through 2021. Overall, we expect that the BoC will have the confidence to announce a taper to its bond purchases at the April meeting. Following a substantial 213K decline last month, a 75K rebound in February employment (Friday) is expected, given the easing in containment measures in most parts of the country. We also see the unemployment rate edging lower to 9.2%.


Yields: The team expects market volatility to persist in the near-term, following Fed Chair Powell hawkish nuance last Thursday, which fails to anchor rates. The short-term risk is asymmetric for rates to rise, especially ahead of event risk on Wednesday (US CPI and 10-year Treasury auction) and after US fiscal stimulus is due to pass the House this week. Meanwhile, we note that short positioning in 10-year Treasuries is stretched, reinforcing that there is more two-way risk after this week.

·EUR: The team expects the ECB at its March 11 meeting to sound modestly dovish as i) the ECB is genuinely concerned about the possibility of undue tightening, and ii) this is an opportunity for the ECB to signal some dovishness since the Fed is not pushing back against the rise in yields. Thus, we expect some pickup in ECB purchases without the need to make changes to the purchase programme envelopes. As for views on the currency:

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