(Reuters) – Markets appear now to want a large U.S. rate increase in March. Federal Reserve minutes, and comments from policymakers in the coming days will be key.

European and Japanese bond market may continue testing policymakers’ resolve to control rising borrowing cost. UK data might shed some light on Bank of England’s next move. Shuttle diplomacy could also be used to avoid war in Ukraine.

Here’s your week ahead in markets from Ira Iosebashvili https://www.reuters.com/journalists/ira-iosebashvili in New York, Kevin Buckland https://www.reuters.com/journalists/kevin-buckland in Tokyo, Sujata Rao https://www.reuters.com/journalists/sujata-rao, Karin Strohecker https://www.reuters.com/journalists/karin-strohecker and Dhara Ranasinghe https://www.reuters.com/journalists/dhara-ranasinghe in London.

1 MINUTE BY 10 MINUTES

After U.S. inflation posted its biggest annual increase in 40 years https://www.reuters.com/business/us-consumer-prices-rise-strongly-january-weekly-jobless-claims-fall-2022-02-10 in January, markets are pricing in a strong chance the Fed will hike rates by half a percentage point in March.

The minutes from Wednesday’s Fed meeting in January may be out of date. However, markets that are edgy will look for clues on the size of any potential rate hikes.

The Fed last month flagged a rates lift off for March https://www.reuters.com/business/finance/inflation-fighting-fed-likely-flag-march-interest-rate-hike-2022-01-26 and also reaffirmed bond purchases will end then. This may give some indication as to when and how fast the Fed could reduce its balance sheets, which nearly doubled in size during the pandemic. 

Corporate earnings will include Nvidia (NASDAQ) and Walmart (NYSE) chipmaker.

2. WHO IS THE BOOSS?

    If markets needed a reminder about who’s in charge, the Bank of Japan was happy to comply, saying it would buy an unlimited https://www.reuters.com/markets/rates-bonds/boj-announces-plan-buy-unlimited-amount-10-year-jgbs-2022-02-10 amount of 10-year bonds at 0.25% and underscoring its resolve to prevent borrowing costs rising too high.

Japan’s 10-year bond yield has hit a six-year peak https://www.reuters.com/markets/rates-bonds/what-boj-can-do-about-rising-japanese-bond-yields-2022-02-08 every day for a week, rising to 0.23%, just 2 bps off the BOJ’s tolerance limit.

Many believe the rising bond yields in Japan could be an indication of a global trend towards tightening monetary policy.

This is evident from the bond market intervention. Governor Haruhiko Kuroda https://www.reuters.com/world/asia-pacific/bojs-kuroda-says-not-debating-exit-easy-policy-mainichi-2022-02-10 continues to pledge extraordinary support for the economy, the latest reading on which is out Tuesday.

3 ECB “PUT”

The BOJ is stepping in. However, it seems that the European Central Bank may permit borrowing costs to increase as it concentrates on inflation.

Southern European 10-year bond yield premiums over Germany are at the widest since mid-2020; Italy’s spread is 20 bps wider from levels seen before the hawkish ECB pivot on Feb. 3 https://www.reuters.com/business/ecb-seen-hold-may-acknowledge-inflation-risks-2022-02-02.

Yes, the periphery is in a stronger position https://www.reuters.com/article/europe-ratings-sp/italy-greece-have-buffers-from-rising-rates-sp-global-analyst-idUKL8N2UH09S to cope, thanks to low debt refinancing costs and the EU recovery fund.

But a potentially faster-than-anticipated unwinding of the stimulus that has long buffered the periphery is a big deal, and the ECB ‘put’ could be put to the test https://www.reuters.com/world/europe/euro-zone-bond-markets-ecb-put-is-some-way-off-2022-02-10.

Usually used to refer to Fed’s support for stock markets, this term describes the willingness of the ECB to accept rising yields which could increase financing conditions or raise fragmentation risk. The markets are correct to be nervous.

4. BIG DATA

This week is big data in Britain, with the latest unemployment figures on Tuesday and inflation data Wednesday. Retail sales Friday will also be available.

They’re in focus because the Bank of England just delivered back-to-back rate rises https://www.reuters.com/business/bank-england-hikes-rates-clamour-contain-spiralling-inflation-2022-02-03 for the first time since 2004, trebled wage growth forecasts and predicted inflation to peak above 7%. By year-end, the market price 130 more basis points of rate increases.

Data last month showed a 4.1% unemployment rate https://www.reuters.com/world/uk/uk-employers-add-jobs-dec-unemployment-falls-2022-01-18 for the three months to November, the lowest since June 2020; new hirings surged by a record amount in December.

Consumer prices, meanwhile, accelerated in December to near 30-year highs https://www.reuters.com/world/uk/uk-inflation-rises-highest-since-march-1992-2022-01-19 of 5.4% and may only peak in April when households face energy bill hikes of up to 50%.

While December shopping was hit https://www.reuters.com/business/retail-consumer/uk-retail-sales-slumped-by-37-december-ons-2022-01-21 by Omicron-linked curbs, latest retail sales may also show consumers’ mood https://www.reuters.com/business/uk-consumers-take-fright-rising-inflation-rates-gfk-2022-01-21 being soured by inflation, lofty energy bills, higher rates and tax hikes.

5/TROOPS, TABLES, AND TALKS

Shuttle diplomacy https://www.reuters.com/world/europe/kremlin-denies-putin-told-macron-there-will-be-no-new-manoeuvres-near-ukraine-2022-02-08 is at fever pitch to prevent tensions between Moscow and the West tipping over https://www.reuters.com/article/us-ukraine-crisis-britain-lavrov-idUSKBN2KF1K2 into a full-blown conflict https://www.reuters.com/world/europe/russian-attack-ukraine-possible-any-day-diplomacy-still-an-option-white-house-2022-02-06 around Ukraine.

German Chancellor Olaf Scholz, who will be visiting Ukraine’s President Volodymyr Zeleskiy Monday after the French president Emmanuel Macron’s trip, then travels to Moscow to meet Vladimir Putin. The Polish foreign minister will be in Moscow, while NATO’s defense ministers summit is in Brussels on Wednesday.

While Russian troop build-up near Ukraine’s border continues https://www.reuters.com/world/europe/wrapup-1-russia-starts-belarus-military-drills-amid-new-diplomacy-ukraine-2022-02-10 and Western powers send military to Europe’s eastern fringes and ready sanctions on Moscow, markets seem to be focusing on other issues such as central banks and inflation.

The coming days may show whether the flurry of diplomacy improves international ties and keeps Russian energy https://www.reuters.com/world/europe/germany-ready-pay-high-price-defend-values-baerbock-moscow-2022-01-18flowing into Europe.