S&P500 index ended 0.2% lower

Market Movers

• Today’s main event will be the FOMC monetary policy announcement. We expect the FOMC to keep the fed funds target rate unchanged at 0.25%-0.50%. This is widely expected and focus will instead be on the updated projections for the fed funds target rate (the so-called 'dots'). We expect the Fed to signal two or three hikes this year (down from four) and four hikes next year (unchanged). The Fed is likely to keep the door open for a June hike and given that markets have only priced in one hike both this year and next, we think it is likely that the Fed will be interpreted hawkishly. Our main scenario is that the Fed will stay on hold until September but the probability of a move in June and that the Fed will tighten monetary policy more than once in 2016 has increased due to the rebound in risk sentiment, continued improvement in the labour market and higher PCE core inflation. See FOMC preview: Fed set to keepdoor open for a June hike, 14 March, for details.

• Before the FOMC monetary policy announcement, we get another series of US data releases: US core CPI is expected to increase 0.2% m/m February and remain unchanged at 2.2% y/y. Industrial production data is expected to decline 0.3% m/m in February following a 0.9% increase in January.

• In the UK, we estimate both the unemployment rate (3M average) and the annual growth rate in average weekly earnings excluding bonuses (3M average) were unchanged in January at 5.1% and 2.0% y/y, respectively. We think wage growth has reached a bottom and we expect it to pick up gradually from here due to the tighter labour market. That said, it is likely that employment growth will slow in H1 16 due to slower economic growth amid ‘Brexit’ uncertainties.

• In Sweden, we get the quarterly, extended Prospera inflation expectations survey, while Danmarks Nationalbank will publish its Monetary Review. See Scandi Markets.

Selected Market News

It has been relatively quiet overnight both in terms of news flow and market movements as investors remain cautious ahead of the FOMC meeting tonight. In the US, the S&P500 index ended 0.2% lower last night, while the Dow Jones index rose 0.1%. In Asia this morning trading is also mixed with Japanese equity markets down 0.8%, while Chinese equity indices trade in the range from -1% to +0.5%.

Bank of Japan Governor, Kuroda, this morning testified before the parliament on the Bank's semi-annual Report on Currency and Monetary Control. The statement did not contain any news compared to the information we got in connection with the monetary policy announcement yesterday when Kuroda underscored that the Bank stands ready to ease further if needed. However, when questioned by lawmakers about negative interest rates, Kuroda agreed that it would be theoretically possible to lower the interest rate to -0.5%. We still expect the Bank of Japan to eventually catch up on negative interest rates with European central banks and it to cut its key policy interest rate by 20bp in July to -0.3%.

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