Macroeconomics: The Day Ahead for 18 March

Following on from the Fed and Brazil’s BCB yesterday, today has central bank policy meetings in the UK, Norway, Indonesia, Taiwan, Turkey and Egypt, and a further raft of central bank speakers. These are accompanied by a relatively modest schedule of data, encompassing the overnight NZ Q4 GDP and Australian Unemployment, with Eurozone Trade and US weekly jobless claims and Philly Fed ahead. Today all sees the results of the latest ECB TLTRO III operation, which is significant in so far as is the first operation, which benefits from the easier terms announced in December, which increased the eligible loans allowance to 55% from 50%, and extended the interest rate discount period by 1 year to June 2022 (details here); there is as ever a good deal of uncertainty about take-up, though the consensus appears to be in the EUR 180-200 Bln area. There are also govt debt sales in France, Spain, Canada and the US, while a busier day for corporate earnings sees results from: Endeavour Mining, Enel, FedEx, HeidelbergCement, Nike and RheinMetall amongst others.

In terms of the FOMC meeting, the Fed stuck to its ‘patient’ gun, with the dot plot still signalling no rate hike before end 2023, though it would not take only one or two FOMC members to shift the projections higher at the June meeting to signal a hike. Upward economic forecast revisions were in principle nothing more than an acknowledgement of incoming data, though the downward revisions (i.e. better) to Unemployment Rate forecasts imply less scope for the Fed to rely on labour market slack as justifying an overshoot on inflation. The FOMC ‘dodged the bullet’ on the SLR (Supplementary Leverage Ratio) exemption extension deadline, though Powell said there would be an announcement in coming days, and the decision to raise the volume cap on daily Fed O/N repo operations from $30 Bln to $80 Bln suggests that the Fed is looking to let the SLR exemption expire on March 31. As can be seen from the attached charts, markets reacted calmly, but long-term nominal yields remain at the highs, the curve continued to steepen, and the unwind of 2022/2023 rate hike risks in Eurodollar futures was very modest. In other words, markets are still saying the Fed is ‘behind the curve’.  Elsewhere Brazil’s BCB COPOM committee opted for a more aggressive 75 bps hike to 2.75%, which raises the bar for Turkey’s TCMB today, which is expected to hike rates by a further 100 bps to 18.0%, as a weaker TRY and rising oil prices put renewed upward pressure on CPI, with the moves to ban the pro-Kurdish HDP party not helping the TRY today.

** U.K. – BoE MPC meeting **

– The BoE is expected to hold policy and also to confirm that its weekly QE purchase volume will be maintained at £4.4 Bln, while maintaining its flexibility to change the pace if required. It will doubtless point to downside risks to a nevertheless improving economic outlook, despite the expected Q1 GDP contraction likely being not as bad as it had originally forecast. It will probably resist the temptation to push back on the rise in longer-term yields, as the ECB has done, suggesting that this is largely a reflection of greater optimism on the outlook. As governor Bailey has recently noted, the risks going forward are increasingly ‘two-sided’, but with inflation still well below forecast, and its (and other G7 central banks’) policies clearly being reactive rather pre-emptive at the current juncture, the BoE’s MPC will be happy to await a little more clarity on the outlook before signalling, let alone taking any policy action.

** U.S.A. – Weekly Jobless Claims, March Philadelphia Fed Manufacturing **

– Initial Claims are again expected to dip, but again only modestly to 700K from prior 712K, and would as such remain above the pre-Covid-19 record high, and despite signals from surveys suggesting that easing movement restrictions and recovery from bad weather effects have seen labour demand pick up substantially, above all in those parts of the service sector that have been hardest hit by the pandemic. There is increasingly some talk that this may be to potentially fraudulent claims, and pointing to some states with high levels of initial claims, but unemployment rates below the national average. Be that as it may the risks would appear to be for a better than expected outturn, with an accelerating improvement likely in coming weeks and months. As for the Philly Fed Manufacturing survey, this is seen little changed at a very solid 23.0 (Feb 23.1), with the sector continuing to see solid recovery related demand against a backdrop of low inventories, with a continued focus on the impact of supply chain disruptions. It should also be noted that as output rises above pre-pandemic levels, outlook measures are likely to ease back given reduced scope for ‘catch-up’. Per se this would not be a negative development, but rather a ‘normalization’ signal.