Fed, BOJ in the spotlight but no fireworks expected

The Bank of Japan (BOJ) headquarters stands in this aerial photograph taken in Tokyo, Japan.
Kiyoshi Ota | Bloomberg | Getty Images
The Bank of Japan (BOJ) headquarters stands in this aerial photograph taken in Tokyo, Japan.

Central banks will be in focus this week, with monetary policy decisions due from the Bank of Japan (BOJ) and the U.S. Federal Reserve.

Since raising interest rates in December 2015, sending stock markets into a frenetic sell-off in January, the Fed has maintained its narrative that any forthcoming rate hikes will be data-dependent.

Many market watchers do not think a hike is on the cards when the Federal Open Market Committee meets on March 15-16, but they will be looking for clues on the Fed's future policy outlook.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, said in a note on Friday that there was a Fed-markets divergence.

"In particular, the Fed's median "dot plot" showing Fed decision makers' expected path for interest rates going forward is likely to show more interest rate hikes this year, but only three 0.25 [percent] hikes down from four," said Oliver, compared to market expectations for no more than one hike in 2016.

The so-called dot plot is released as part of the FOMC's Summary of Economic Projections, alongside its policy decision statement, and shows where individual committee members think interest rates should be in the current year and in future years.

But, Oliver added, the Fed and the market are likely to come closer together in their expectations over interest rate hikes this year.

Japan's central bank commences a two-day meeting starting March 14.

The Bank of Japan's surprise decision on January 29 to adopt a negative interest rate policy did little to stabilize financial markets; instead, it bolstered appetite for the safe-haven yen, with the currency strengthening against the dollar.

Moody's Analytics said it expected the BOJ to keep its pace of asset purchases unchanged.

"After ushering in negative interest rates on excess reserves in January, we believe this meeting is unlikely to ignite fireworks. But inflation remains consistently below the BOJ's 2 [percent] target. Therefore, further monetary easing isn't off the cards just yet," Moody's said in a note on Friday.

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Clues on China's economy

With the National People's Congress (NPC) meeting set to conclude this week, investors will watch for further clues on how the Chinese government plans to steer the world's second largest economy through an economic rebalancing.

On March 15, China's February foreign direct investment (FDI) data is due. Moody's said there was little sign of an upside in FDI as foreign investors shy away from the issues plaguing China: overcapacity, excess housing inventories, expectations of lower returns due to low interest rates and fears of sharper slowdown in growth.

FDI is estimated come in at $9 billion for February, according to Moody's.

Over the weekend, another round of Chinese data showed factory activity remained weak, retail sales slowed while fixed-asset investments rose. Reuters reported government data showed factory output grew 5.4 percent in January and February from a year earlier, slowing from a 5.9 percent rise in December.

Retail sales, which is a measure of domestic consumption, rose 10.2 percent in the first two months, falling short of market expectations of a 10.8 percent rise. Fixed-asset investment was up 10.2 percent in January and February from a year earlier, beating expectations of 9.5 percent, reported Reuters.

Jobs Down Under

Australia's employment data are due on March 17.

The National Australia Bank (NAB) estimated the February unemployment rate to be 5.9 percent, a decimal point below the 6 percent market consensus.

David de Garis, director and senior economist for fixed income, currencies and commodities at NAB, said in a note, "Notwithstanding the many misgivings that surround the month-to-month movements in this report, the trend in employment growth has been undeniably positive."

"Against some expected moderation in the underlying rate of net job creation, impacts from incoming and outgoing sample rotation groups inevitably feature in the published estimates and could affect the unemployment rate this month, likely downward."


New Zealand's growth

New Zealand's fourth quarter 2015 gross domestic product data is due March 17, with Moody's expecting the economy to have expanded 0.7 percent on-quarter.

"The two-speed themes of the economy are on display. The external sector has felt the pinch on the back of falling farm incomes and lower global demand," said Moody's.

Last week the Reserve Bank of New Zealand surprised markets by cutting the cash rate to 2.25 percent, citing a deterioration in global growth and a weak domestic dairy industry as headwinds.

Other data due include Japan's foreign trade numbers of February on March 17, South Korea's employment numbers on March 16 and India's Wholesale Price Index on March 14.

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