Macroeconomics: The Day Ahead for 10 March

Two items on the daily schedule may impinge temporarily on the steadfast focus on the Ukraine war: the ECB policy meeting and US CPI. In the footnote column, there are also rate hikes expected in Hungary (1-week Depo +65 bps, Peru +50 bps), another speech by RBA’s Lowe, UK RICS House Price Balance, Norwegian CPI and US weekly jobless claims, as well as govt bond auctions in Ireland (10 & 15-yr), Canada (3-yr) and USA (30-yr). Yesterday’s relief rally in equity markets and the very modest correction in energy and many commodity prices was perhaps instructive, in so far as it appeared to be mostly driven by hope that the conflict would end quite soon (boosted by talks to be held by Ukraine and Russia Foreign Ministers in Turkey today), and yet this effectively assumes that ‘everything goes back to normal’, which the sharp but still partial setback in energy and commodity prices leans against (particularly with the UAE dialling back on talking of boosting oil production today). To be sure, discombobulation and disconnect in terms of asset class reaction functions should be expected given a total lack of visibility on how the situation evolves in the Ukraine; but bear in mind the old adage that bear market rallies (in bond and / or equities) are often the most vicious. On the other hand, there is one safe assumption, a durable cessation of hostilities would not wave a magic wand and suddenly resolve the pandemic and war related supply chain bottlenecks and disruptions (as per VW chief Diess comments this morning), and would not result in an immediate end to sanctions, with yesterday’s decision by Russia to nationalise property of foreign firms that leave Russia only adding to what will be a long list of measures that would have to be rolled back on both sides.

** Eurozone – ECB Council Meeting **

– The ECB has the unenviable task of being the first major central bank to present its policy update on Thursday, and is expected to push back on policy tightening expectations, emphasizing downside risks to the growth outlook, while conceding upside risks to inflation from the surge in commodity prices and widescale disruption to supply lines. There will be a fresh set of staff forecasts, or rather model based “best guesstimates”, wherein there will be downward revisions to growth estimates, but more significant will be just how far the HICP forecasts are revised higher for 2022, 2023 and 2024, bearing in mind that December anticipated 3.2%, 1.8% and 1.8% y/y respectively, with some estimates now suggesting that the headline HICP peak in 2022 could be as high as 7.0%. But in policy terms it is the 2024 estimate that will be critical. The immediate question is what happens in terms of the PEPP to APP transition, which had been expected to be changed from the December 2021 plan to halt PEPP purchases, but increase APP to EUR 40 Bln/month in Q2, and then reduce to EUR 30 Bln/mth in Q3 before reverting to EUR 20 Bln/month in Q4. The question is how much reduction in these volumes relative to that original plan will there be now, and market reaction, bearing in mind that markets are still pricing in a 25 bps rate hike by December 2022. Lagarde & co will also face some testing questions about sticking to a dovish policy line in the face of increasing EUR weakness. It will also be interesting to see if Frau Schnabel is co-opted into the press conference in the context of the collateral squeezes in Eurozone money markets, given that she is the ECB board member responsible for Market Operations, Research, and Statistics.

** U.S.A. – February CPI **

– While today’s report is effectively a baseline reading to gauge how much higher inflation will go given the almighty leap in commodity and energy prices due the war in Ukraine, it should be remembered that February was previously expected to have been the peak for inflation, as base effects kicked in, which will no longer be the case. Be that as it may, the consensus looks for a 0.8% m/m rise in headline and 0.5% in core to take y/y rates up to 7.8% and 6.4% respectively, with gasoline and food the biggest contributors to headline, and housing (OER) continuing to pace the rise in core, with more to come from all three in coming months. Used cars should be a drag this month (given a fall in the Manheim index), but Services may be the critical swing factor, with Omicron effects unwinding and boosting travel and leisure, while car and other insurances also continued to march higher. Would a higher or lower than expected outcome tilt the balance of FOMC members’ opinions on next week’s decision? At the margin, but it is likely to be financial conditions, which have tightened to a degree and will likely weigh more heavily in the equation, in principle as a signal of how much work markets are doing for the Fed.