Macroeconomics: The Day Ahead for 2 March

In normal circumstances, which these are 100% not, today’s schedule of data and events would be something for the macro connoisseur, but the focus remains on Russia’s invasion of Ukraine. That said, there are elements of the day’s schedule which will have some impact, with Biden’s State of the Union address overnight, the OPEC+ meeting, Powell’s semi-annual monetary policy testimony to House Financial Services Committee, an expected Bank of Canada rate hike and perhaps the Fed’s Beige Book. Other central bank speakers include ECB’s Lane and Schnabel, who seem likely to echo their colleague Rehn, who yesterday said the ECB shouldn’t exit stimulus before assessing impact of the Ukraine Russia conflict, warning of recession risk in the event of ‘premature’ ECB action. Statistically there are the better than expected Australia Q4 GDP, UK BRC Shop and Nationwide House Prices to digest ahead of German Unemployment, Eurozone CPI and US ADP employment. There are also bond auctions in UK (3-yr) and Germany (8-yr).

Put very simply, we are now very much in a place where the statement that ‘he/she/they would not do that, would they?’ holds little or no water, because the answer is almost certainly ‘That is very likely a bad assumption’. Be that as it may, yesterday’s sharp moves in govt bonds, above all the Eurozone, underline two things: a) very poor liquidity conditions for which long-term central bank QE has the most to answer for, along with the ‘nuclear’ measures to freeze Russian central bank assets, which unsurprisingly had a much larger impact on Eurozone govt debt, with a clear sign of contagion into UK Gilts later in the day; and b) in the same vein, there is a collateral shortage, for which the very divergent performance of Investment Grade Credit in USD (wider) and EUR (tighter) on the day offers further evidence, and indeed the underperformance of Bunds, given that the Federal Debt Office has already taken measures recently to alleviate EUR repo market dislocations that were all to palpable in January. See also charts and daily change tables attached. The violent moves in Energy and Commodity markets, which above all in energy show no sign of easing overnight, and in turn makes a violent correction at some stage inevitable, with the usual accompaniment of margin calls, which will almost certainly claim some scalps.

So what should we look from Powell? In the first instance it will be any departures in the Q&A from the prepared testimony already published on Friday last week – see https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.federalreserve.gov%2Fmonetarypolicy%2F2022-02-mpr-summary.htm&data=04%7C01%7CSimrat.Sounthe%40admisi.com%7C5b1420b06da745e07cde08d9fc275c6d%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637818068289759412%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000&sdata=%2Bzxq8ecLHNwpUQeyQhyglp9w5vpr6uaA6TwJdUOZhUs%3D&reserved=0, given the measures taken against Russia over the weekend. While comments on inflation, growth and the labour market will be of interest, it will be anything related to financial conditions and stability, which require most attention. Be that as it may, it is a measure of how far central banks are behind the curve on inflation (and this is not including the latest inflationary shocks from the Ukraine Russia war), that neither the BoC today, nor the Fed or Bank of England are expected to shelve expected March rate hikes, even if the more aggressive moves that had been mooted have been priced out of markets. To be sure rate trajectory expectations (market and central bank) will inevitably be seen as lower, though there is a risk of a sharp repricing in the event of a cessation of hostilities (rather than ceasefire). 

** Eurozone – February prov. CPI **

– In the wake of largely energy price driven upside misses on French, German, Italy and Spanish HICP readings, the consensus for Eurozone CPI has been revised high to 0.6% m/m 5.6% y/y (vs. Jan 5.1%) headline and 2.6% y/y (vs. 2.3%) for core CPI, the latter above all important in terms of signs of energy price pressures spilling over into Services. Given the surge in commodity prices, there will be further upward pressure in coming months, which will certainly give the ECB an even bigger headache in policy terms, but for the time being, it will be focussed on risks to the growth outlook.

** OPEC+ meeting **

– Yesterday’s IEA decision to release 60 Mln bbls from storage was inevitable given the extreme backwardation evident in Reuters’ John Kemp’s attached chart of the 6-month Brent spread, but with global oil demand 99 Mln bbls/day, this was in practice no more than symbolic. Still there is no question that there will still be pressure on OPEC+ to increase output, though the consensus expects no change from the currently planned increase of 400K bbls/mth. However, as previously noted, with countries like Iraq already struggling to meet current quotas, let alone any increase from the already planned 400K/mth, there is a credibility issue. To be sure, as the year goes on,, there is scope for the US shale sector to increase output, but its inventories are already low (including the US SPR). But in the short-term it is the volume of exports (from inventories) that is of far greater importance, above all from Saudi Arabia.