LONDON Government bond yields have tumbled on the basis that the world's major central banks will continue to keep monetary policy easy and in some cases loosen further.
Economic data in the week ahead - most notably May purchasing managers surveys (PMIs) from the United States, China and the euro zone - will be used by investors to test that thesis.
Five senior sources have told Reuters that the European Central Bank is preparing a package of policy options for its early June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
A distinctly mixed bag of euro zone GDP data, which showed Germany charging ahead and Spain holding its own but France stagnating and Italy, Portugal and the Netherlands slipping back into contraction, will have done little to dissuade the ECB from moving.
"While speculation mounts in Europe as to the composition of a package of ECB measures in June, as the central bank seeks to fend off excessively low inflation, across the Atlantic, all eyes will be on the U.S. FOMC minutes next week for hints about a policy exit," said Paul Mortimer-Lee, global head of market economics at BNP Paribas.
Minutes of the Federal Reserve's last policy meeting, at which it reduced its monthly bond purchases to $45 billion from $55 billion, will be released on Wednesday.
At the April 30 meeting the Fed stuck to its assessment that the economy would need near-zero interest rates for a considerable time after asset purchases are fully wound down by year-end. The U.S. economy hardly grew in the first quarter but has gathered pace since.
There may have been discussion about a future exit strategy.
"The last FOMC meeting saw a closed-doors session on 'medium-term monetary policy issues'," Mortimer-Lee said. "Such sessions were held in 2011 and led to a discussion of exit strategies and later to a formal outline of the strategy."
The Bank of Japan delivers its latest policy decision on Wednesday and is set to maintain its upbeat view of the economy, suggesting no immediate expansion of stimulus is likely.
Talk of tighter policy is not even in the air and the BOJ is
expected to maintain its monetary policy framework, under which it increases base money by 60-70 trillion yen ($589-$688 billion) per year via aggressive asset purchases.
"The key concern for the BOJ is the weakness in exports and whether wages will increase enough for consumers to continue spending," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
Recent data from China has shown weakness in output, investment and consumption, raising expectations that the People's Bank of China will come in with some form of stimulus if Beijing is to meet its 7.5 percent growth target this year.
China's last reading showed its manufacturing sector shrank for a fourth successive month in April. The U.S. and euro zone PMIs are forecast to hold steady in May, both well above the 50 mark that separates expansion from contraction.
Until recently, expectations had centered on the Bank of England being the first of the big central banks to tighten policy.
But BoE Governor Mark Carney stressed last week that there was no hurry to raise interest rates, despite the British economy's fast recovery and the threat of a growing bubble in the housing market.
British inflation data, forecast to show the rate edging up to 1.7 percent in April, comfortably below the Bank's 2.0 percent target, is unlikely to shift policymakers' thinking.
As investors have got over initial concern about the slowing of Fed stimulus, emerging markets have come back into vogue.
According to fund-tracker EPFR, investors put $400 million into emerging equity funds in the week ending May 14, while EM bond funds drew in $1.2 billion. In that arena, both Turkey and South Africa hold interest rate meetings in the week to come.
Turkey's central bank has so far resisted Prime Minister Tayyip Erdogan's call for immediate rate cuts to start reversing a dramatic increase enacted in January to shore up a tumbling currency.
It has said policy will stay tight until there is a significant improvement in the inflation outlook.
South Africa's Reserve Bank will probably leave interest rates on hold, preferring to spur the economy after labor strikes hurt growth in the first quarter.
But it will be a close call with inflation on the rise. Seventeen of 28 economists surveyed by Reuters expect rates to stay at 5.5 percent, four forecast a quarter-point increase and seven predicted an increase to 6.0 percent.
($1 = 101.8050 Japanese yen)
(Editing by Susan Fenton)