Macroeconomics: The Day Ahead for 11 March

Having absorbed the ECB policy shift and US CPI, and with the Ukraine Russia talks yesterday delivering nothing, today’s run of scheduled data and events is unlikely to offer much in the way of distractions from the war in the Ukraine. There are the better than expected UK monthly GDP and activity indicators to look over along with Japan’s downbeat BSI survey, while ahead lie Indian and Mexican Industrial Production, Brazil’s IPCA Inflation IBGE, Canada labour data and perhaps the only item which might prompt some reaction: provisional US Michigan Sentiment for March. There are also UK BoE Inflation Expectations and some ECB speak from Centeno and Rehn, while Italy auctions 3, 7 & 15-yr BTPs.  The fact that yesterday’s talks between Ukraine and Russia yielded precisely nothing serves as a reminder that while hoping against hope for a swift resolution to the conflict is understandable, there is nothing in Russia’s current stance that indicates any willingness to give any ground without total surrender. While this may change going forward, for the time being it is sadly the case that there needs to be something more substantive on the table, before hope gets genuine ascendancy. Be that as it may, while volatility remains baked in the cake in terms of price action in markets, overall price action still suggests that the long-term habits of TINA and FOMO in the face of central bank financial repression have not been exorcized by any manner of means, despite the array of war, supply chain disruptions, inflation and the likely policy tightening by major central banks.

In the latter respect, next week brings a flurry of first division data, above all from China and the U.S., which will be little more than statistical roadkill, as the focus turns to the Fed, BoE and BoJ policy meetings, and otherwise remains squarely on the conflict in the Ukraine. Both the Fed and BoE are expected to hike rates 25 bps, while the BoJ will likely signal there is no near-term prospect of removing accommodation. The Fed is also likely to echo the ECB, in trying to offer an element of predictability in what are very uncertain circumstances, while retaining optionality and flexibility. Powell is a devotee of Greenspan gradualism, and it will require a very sudden tightening of financial conditions as per the example of Feb/March 2020 to change tack. The open question is what happens to the Fed’s balance sheet. Ahead of the war in Ukraine, they had pushed back on the timeline for starting QT (earliest in Q3), though there were/are a very wide range of opinions, both on when they should start, and the pace, other than quicker than the last round of QT – the consensus seemed to be $100 Bln/mth rather than $50 Bln, but there has been talk of $150 Bln. Given all the uncertainty, they may opt for a tapering into QT to give themselves extra flexibility, though with larger increments, $25 Bln then $50 Bln, $75 Bln and then $100 bln. Their biggest challenge is that they want to have a strong element of predictability on balance sheet reduction, but the current circumstances are very much antithetical to this.

** U.K. – January GDP **

– The sharp 0.8% m/m in January GDP after a modest 0.2% m/m drop in December due to the spread of the Omicron variant attests to the level of pent-up demand, and was above all paced by Services (0.8% m/m), though with solid expansions seen in Manufacturing and Construction. The ONS highlighted strength in wholesaling, retailing, restaurants and takeaways, computer programming and film and television production. While this rebound is encouraging, it pre-dates the even larger pressures on household finances from inflation, with the key litmus test in terms of growth coming in April when utility prices (electricity, gas, broadband) and council tax hikes come into force. For that reason alone, leaving aside the war in the Ukraine, the BoE’s MPC will continue to be cautious about aggressively tightening policy.