Macroeconomics: The Day Ahead for 16 March

The US dominates both the data (Retail Sales, Import Prices) and events (FOMC meeting) schedule, with honourable mentions going to Canadian CPI and Polish core CPI statistically, and the IEA’s monthly Oil Market Report and an expected further 100 bps rate hike to 11.75% in Brazil, and some ECB speakers on the events schedule. But war in Ukraine remains front and centre, and as much as negotiations between Ukraine and Russia continue, offering some hope of a ceasefire, it is China’s moves to try and curtail a rapid rise in Covid-19 infection rates, and hints overnight of further fiscal and monetary stimulus, along with the Kremlin’s announcement yesterday of a USD 9.0 Bln spending package to rebuild supply chains in order to support a rapidly crumbling and isolated economy, which are perhaps of greater significance. Inevitably there will be a lot of focus on whether and how the $117 mln of coupon payments due on two Russia (sovereign) foreign bonds are, or are not paid today. But the latter is more a case of financial sector navel gazing, above all relative to the point the Kremlin’s media censorship and lies cannot disguise the reality of sky rocketing prices, ATM queues and emptying supermarket shelves from the broader Russian populace. The IEA’s monthly Oil Market Report may well be overshadowed by China ‘lockdown’ news, (and the assumption of lower near-term oil demand as a consequence) as well as the chatter around Saudi Arabia being in talks to price its oil sales to china in CNY, according to Wall Street Journal sources (https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Ft.co%2Fcqwq1xeoYF&data=04%7C01%7CSimrat.Sounthe%40admisi.com%7Cbdd50d87e26840291d2c08da072790cf%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637830163772630877%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=D3hc3%2BT5u6l903ebufWXaRFwgWTZiqPDPrEOuvH09to%3D&reserved=0). This would obviously be a very significant shift, if correct, and fit with the emergent trend towards a more fragmented global payments system, which predates the Ukraine war, as well as a smaller poll of petrodollars. It is well worth noting and contemplating the fact that less surplus ‘oil trade dollars’, and a fracturing of the global payments system, would make Asian trade finance even more reliant not on China, but rather Japan. This is because its mega banks have long been reliant on making profits in the dollar arena, given the very static demand for credit, while Chinese state owned banks have a much smaller footprint globally, and in any case currently have much larger fish to fry at home with the fall-out from the property sector’s woes.

** U.S.A. – FOMC meeting **

– The Fed is 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. His recent testimony effectively pre-announced a 25 bps rate hike to 0.25%-0.50%. There will be a fresh set of economic projections, which will likely see growth revised down somewhat, inflation revised up and Unemployment revised lower. But as ever the focus will inevitably be on the upward revisions to the rate trajectory in the ‘dot plot’, which will still probably be a little lower than current market expectations of at least 7 rate hikes in 2021. The still very 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 on the FOMC, 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, i.e. starting with $25 Bln then $50 Bln, $75 Bln and then $100 bln. But it seems increasingly likely that their specific plans will not be announced today, but at at the May meeting. Their biggest challenge is that they want to have a strong element of predictability on balance sheet reduction, but current circumstances are very much antithetical to this.