* Yellen's comments on U.S. rates leave investors guessing
* International diplomacy to take centre stage over Crimea
* ECB's rate meeting not until April 3; PMIs in focus
By Robin Emmott
BRUSSELS, March 23 The guessing game over U.S.
interest rates is likely to intensify this week after new Fed
Chair Janet Yellen raised the prospect of a hike early next
year, while Russia's annexation of Crimea will keep investors
focused on its next move.
In a week heavy with diplomacy - U.S. President Barack Obama
will meet Chinese counterpart Xi Jinping on Monday in The Hague
- markets will seek clarity from the U.S. Federal Reserve on its
monetary policy and from Russia over its intentions in Ukraine.
While the U.S. data calendar is relatively light, Yellen has
got investors talking by suggesting interest rates could start
rising next spring, compared with most economists' expectations
for the second half of 2015.
The question is whether the host of Fed policymakers due to
speak this week, including the Fed's Chicago President Charles
Evans, will try to distance themselves from Yellen.
"We have to consider the possibility of the first rate hike
coming in April 2015," said James Knightley at ING in London.
"Market pricing is still favouring the third quarter of 2015,
but a decent rise in employment and business activity may see
this change," he said.
Last week the Fed, in its first policy-setting meeting under
Yellen, said it would factor in a wide range of economic
measures as it judged the correct timing for raising rates.
Investors are wondering how much of the slowdown in the U.S.
economy this winter was due to bad weather. Data this week may
not clear up that uncertainty because home sales, goods orders
and consumption data will be from February, rather than March.
Still, a Reuters survey of economists shows that Yellen's
comments have not altered their views. Ten dealers of 17 polled
see rate hikes in the second half of 2015, with another four
saying increases would not start until 2016.
That suggests a normalisation of U.S. interest rate policy
has yet to be factored into the U.S. dollar exchange rates
versus the yen and the euro, economists say.
"We can only conclude that despite all the Fed's forward
guidance and efforts to improve its communication, the Fed's
probable course of action is not fully priced into dollar
exchange rates," said Ulrich Leuchtmann at Commerzbank.
"A phase of serious dollar strength will only set in later
in the year. But then it will do so with a vengeance," he said.
G7 MEETS TO DISCUSS RUSSIA
International diplomacy will be dominated by the response to
Russia's annexation of Crimea. Leaders of the world's leading
industrial democracies will hold a Group of Seven meeting
without Russia on the sidelines of a nuclear security summit in
The Hague this week to consider further responses to the crisis.
Russian markets ended last week by taking fright at a U.S.
decision to slap sanctions on Russian President Vladimir Putin's
inner circle of money men and security officials. Finance
Minister Anton Siluanov said Russia might cancel its foreign
borrowing for 2014, though it has enough foreign reserves and a
low enough budget deficit to be able to put off borrowing plans.
Russian stocks may be in for an easier ride if investors
have a sense that the stand-off with the West is not
intensifying for now, even though big risks remain.
Given that U.S. sanctions targeting Russian elites were
stronger than anticipated and that EU leaders added more names
to their list, retaliation from Russia cannot be ruled out.
"While the situation remains tense, it likely remains stable
in the coming weeks," said Mujtaba Rahman, a political analyst
at Eurasia Group. "Wildcards include the possibility of a
flare-up of Ukrainian versus Russian violence in eastern
Ukraine, which would heighten the possibility of Russian
Difficult as it may be to look beyond Russia, China's
release on Monday of the HSBC flash manufacturing purchasing
managers index (PMI) will be arguably the most watched release
in Asia, as investors question how the Chinese economy has fared
in the first quarter.
"The February round of data pointed to the weakest growth
momentum since the global financial crisis," said Mole Hau at
BNP Paribas, referring to the recent slump in investment, retail
sales and factory output.
Chinese Premier Li Keqiang has said the economy faced
"severe challenges" in 2014. Bank of America Merrill Lynch has
cut its first-quarter growth forecast to 7.3 percent from 8.0.
THE PARIS SPEECH
A week before the European Central Bank's (ECB) monetary
policy meeting on April 3, President Mario Draghi has investors
wondering what it will take for him to counter the very low rate
of inflation in the euro zone.
Draghi will speak in Paris on Tuesday to try to drive the
message home that the ECB will stick to its very accommodative
policy stance for a long time, not raising rates even if
inflation picks up.
Draghi has said the ECB would keep a close eye on the euro
exchange rate, one of the key parameters affecting inflation
that is at a four-year low. The Fed's rate hike talk has taken
some steam out of the euro's rise, though that might not last.
A string of euro zone PMIs will also give a sense of the
bloc's recovery, with many economists expecting a slight
increase in the euro area composite PMI, driven by a modest
rebound in the manufacturing sector.
Economists expect French PMIs to improve, while in Germany
better manufacturing surveys could compensate for last month's
weakness. "The gradual recovery continues," Citi economists said
in a note to clients. "We still expect the ECB to cut rates in
June but the window seems to be narrowing gradually."
(Editing by Mark Potter)