LONDON, March 8 (Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them. 1/ INFLATION FOCUS Wall Street is demonstrating a heightened sensitivity to any sign of rising prices, worried it might result in more aggressive interest rate hikes by the Fed. So U.S. consumer price data for February will be closely watched on Tuesday.
It's worth remembering that recent stock market tumbles kicked off when January's jobs data stoked inflation fears by reporting the biggest wage gain in more than 8-1/2 years. February's employment report released on Friday showed the strongest job growth in more than 1-1/2 years, but a slowdown in wage gains.
U.S. CPI rose 2.1 percent year-on-year in January, and a punchy 0.5 percent month-on-month. Stock markets could again come under pressure if the February data show inflationary pressures are building, with investors moving toward pricing four Fed hikes this year rather than three.
-Stock market shrugs off CPI rise but inflation obsession may linger
-U.S. economy adds 313,000 jobs in February; wage growth slows
2/ CASHING OUT The Hong Kong dollar exchange rate isn't where you would normally expect to see too much movement. It's confined to a trading band set and managed by the Hong Kong Monetary Authority. But this week the currency fell to a 33-year low, and markets are on high alert for HKMA intervention as it approaches the weaker end of its 7.75-7.85 trading band against the U.S. dollar.
Hitting 7.85 would force the HKMA to mop up some of the excess liquidity and narrow the interest rate gap that has pushed the spread between Hong Kong and U.S. interbank rates to its widest since the 2008 financial crisis.
The HKMA last intervened to defend the HK dollar's peg in FX markets in 2015. While it sold bonds last year to mop up some cash, it has been absent this time. An attack on the trading band is unlikely to succeed however; the HKMA has some $500 billion in firepower.
The question is, will the market correct itself or will the HKMA be compelled to hold regular liquidity draining operations? For investors, there is no precedent to lean on. As a gateway to Asian economies, money keeps pouring into Hong Kong and the territory is unlikely to suffer a shortage of cash any time soon even if some Chinese money moves back to the mainland.
-Abundant liquidity sends Hong Kong dollar to weakest in 33 years
-Hong Kong Exchange Fund assets at HK$4.193 trln end-Jan – HKMA
-China investors desert Hong Kong stocks in droves as correction fears loom
3/ WINNER WON'T TAKE ALL It's said a war has no winners. That certainly applies to trade wars. In the United States, initiator of the latest battle, big trade and budget deficits make the dollar vulnerable, as does the fact that the Fed (unlike its European and Japanese counterparts) can cut interest rates if things get too nasty. S&P500 companies earn half their profits overseas and will likely suffer from any outbreak of trade hostilities.
But others may be harder hit. Many reckon the dollar will decline less than during the 2002 steel wars - its current account gap is smaller and growth is stronger. What about others? The currencies of small, open, developed economies such as Canada, New Zealand and Australia will fall, while emerging markets will suffer if global economic and trade growth slows.
Metals tariffs alone won't much dent China, South Korea, Taiwan or India - steel exports to the United States comprise 0.2 percent of Korea's GDP for instance. But an escalation to other sectors will hurt, first via equity outflows that then feeds into currencies, especially if the dollar firms.
The markets of trade-reliant countries, such as Korea and Taiwan should be hurt more than domestic-focused ones such as India or Brazil.
4/ POLICY "NORMALIZATION" PATH Central banks' journey back to something resembling policy normalization went up a gear this week when the ECB dropped its pledge to increase QE if needed. Mario Draghi soothed any market concerns in his subsequent press conference, stressing that policy will remain super-loose. This was enough to push the euro, bond yields and bond spreads back down again. But despite Draghi's 'softly softly' approach, it looks like the beginning of the end of the ECB's post-crisis measures is in sight. The question for markets now is how quickly or slowly the ECB moves.
On the other hand, Bank of Japan governor Haruhiko Kuroda quashed creeping speculation the BOJ could tighten policy soon, signaling his readiness to ramp up stimulus if need be. Draghi and several other ECB officials are scheduled to speak next week so there will be further guidance on the pace of change ahead. There are no speeches from Fed officials scheduled for next week, while Jerome Powell chairs his first policy meeting as Fed chair the following week.
-UPDATE 5-ECB gives up on bigger bond buys en route to stimulus exit
-UPDATE 3-BOJ chief brushes aside early stimulus exit, calls for free trade
-UPDATE 1-Bostic says trade measures could offset tax cuts, lead to slower Fed
-Fed's George sees 'upside' risks, wants further rate hikes
Sterling started 2018 with its best monthly performance against the dollar since 2009. But renewed uncertainty about whether Britain and the European Union can agree on their future trading relationship has undermined the pound's rally in recent weeks, despite a more hawkish central bank.
Next week could prove crucial for investors unsure how to trade the pound, given the relative resilience of the UK economy and a stream of negative Brexit headlines.
UK finance minister Philip Hammond gives his half-yearly update on the economy on Tuesday amid an improvement in public finances but nervousness about the outlook. Traders will also be looking closely for progress in talks with the EU to believe a Brexit transition deal - which Britain has said it will unveil in late March - will not be delayed.
Edgy traders briefly pushed the pound to a three-month low versus the euro on Wednesday as the EU rejected Britain's proposed trade deal. Against the dollar, sterling was largely unmoved by this week's Brexit headlines and is stuck trading around $1.3860, five cents below its post-Brexit-vote peak hit in January.
With the market pricing in an 80 percent probability of a Bank of England rate hike for May, the risk is that a delayed transition deal stays the BoE's hand to tighten policy. Given Britain's large trade deficit, its vulnerability to an extended trade war could also weigh on the pound.
- UK's Hammond plans low-key budget update as Brexit nears
- WRAPUP 1-EU snubs Britain's post-Brexit trade demands, offers banks no special deal
- UPDATE 1-UK factories start 2018 in low gear, construction tumbles
Reporting by Megan Davies in New York; Vidya Ranganathan in Singapore; Jamie McGeever, Tommy Wilkes and Sujata Rao in London Editing by Matthew Mpoke Bigg