By Sumanta Dey
Feb 12 (Reuters) - Now markets have delivered their verdict
on inflation - it's not picking up any time soon - economic data
due next week will show whether price pressures are rising
meaningfully or falling back in some of the world's major
economies.
A global rout in stock markets, currencies, commodities and
bond yields has so far defined 2016 as investors have seemingly
lost faith in central banks' abilities to boost inflation, with
signs the world economy is stalling.
Five-year inflation-linked swaps in the euro zone
EUIL5YF5Y=R , for example, suggest annual price growth will be
just 1.4 percent even as far out as 2021.
"Most people don't understand what has spooked markets. It's
up to economic data now to demonstrate that markets have gone
overboard in projecting very low inflation," said Jeavon Lolay,
head of economics at Lloyds Banking Group (L:LLOY).
"One reason is probably that markets don't believe the
response from policymakers is adequate."
The Bank of Japan surprised markets late last month by
cutting its deposit rate to negative. But the impact seems
limited to some knee-jerk weakening in the Japanese yen JPY= .
ECILT/JP
Sweden's Riksbank also slashed its repo rate to -0.50
percent on Thursday, partly as insurance against expectations
that the European Central Bank would ease policy in March.
ECILT/EU
Inflation data from Britain, Canada, China and the United
States next week may set the tone for the global economy.
While Reuters polls suggest at best tepid price rises,
market watchers will look at the underlying trends in inflation
to gauge whether another round of policy easing and stimulus is
warranted.
Federal Reserve Chair Janet Yellen hinted this week the path
to higher interest rates in the United States may be less steep
than previously thought, given the broad market sell-off.
It's not that the outlook for inflation in developed
economies has changed dramatically in the past three months in
polls conducted by Reuters.
But a 75 percent crash in oil prices CLc1 since mid-2014,
and weak global demand, led by China's slowing economy, have
dragged down market inflation gauges like swaps and sovereign
bond yields, with vast swathes now showing negative yields.
The yield of Germany's benchmark bunds DE10YT=RR has
fallen over 40 basis points since January to its lowest in
nearly a year, while Tokyo's Nikkei 225 index .N225 and the
S&P 500 .SPX in the U.S. have fallen over 20 percent and 10
percent respectively.
CHINA REOPENS
The start of the week will probably set the tone for markets
as trade data out of China, due on Monday, are predicted to show
exports slumped at a faster rate in January.
"The trade figures out of China will probably be diced by
markets for (their) impact on commodity prices and global
growth," said Lolay.
Inflation data for January due later in the week are likely
to show a slight uptick, although producer prices are still
expected to have fallen more than 5 percent from a year ago.
China's markets will reopen on Monday, after a week's
holiday to mark the Lunar New Year gave its stock markets a
break from the turbulence triggered by Beijing's currency
devaluation.
Policymakers have tried to instil confidence among investors
regarding their policy intentions by setting higher trading
guidance on the Chinese yuan CNY= in the last couple of weeks.
Still, strategists in Reuters polls predict the yuan will
fall to a multi-year low in the coming 12 months. CNY/POLL
FED TALKS
Financial market turmoil, the weakness in China's economy
and risks to growth and inflation were among the concerns
highlighted by Fed Chair Janet Yellen earlier this week in her
semi-annual testimony to Congress.
While the path of U.S. monetary policy this year is unclear
at best, scheduled speeches of various presidents of regional
Federal Reserve banks, such as those in Philadelphia,
Minneapolis, San Francisco and Cleveland, over the week could
throw some light on the thinking among policymakers.
Cleveland Fed President Loretta Mester, currently a voting
member on U.S. monetary policy, and considered relatively
hawkish, may also give some indication of how far off she sees
the next interest rate hike.
Inflation data due next Friday are unlikely to make the
picture any clearer, although economists predict higher annual
price growth in January compared to December.
"It was striking how frequently Yellen used the prepared
line 'monetary policy is not on a preset course' whenever she
was asked whether recent developments had changed the outlook,"
said Jim O'Sullivan of High Frequency Economics, the most
accurate forecaster in Reuters polls last year.
"The comments further lessen the already very low likelihood
that the Fed will be tightening again as soon as the next
meeting in March."
(Editing by Ruth Pitchford)