Macroeconomics: The Day Ahead for 1 April

Sadly the week ends and a new month and quarter start with the war in Ukraine raging on, with the hopes of some disengagement in hostilities earlier in the week dashed on the rocks of ‘actions speaking much louder than words’, as can again be witnessed with efforts to evacuate civilians and get food supplies to those that remain in Mariupol being thwarted.

There is a very busy run of hard data and surveys, with Manufacturing PMIs, Japan Q1 Tankan (slipping less than expected), Eurozone CPI, US labour data and auto sales topping the agenda, accompanied by the overnight South Korea Trade, US Auto Sales and Construction, Brazil Industrial Production and Trade. The EU and China hold a virtual summit, which has the additional burden of China’s support for Russia, on top of what were already growing trade and political tensions. Following on from the US decision to release 180 mln bbls from its SPR, the IEA holds an emergency meeting to discuss a broader release of oil reserves, but this still looks it will be a relative drop in the ocean and all rather too piecemeal, even with the very clear signals that China’s economy is operating at stall speed. Today also marks the start of the Russian demand that gas trade be settled in Roubles, following the decrees signed by Putin yesterday, which also stipulates if RUB payments are not made, then existing contracts will be stopped. As ever the key question is what happens in reality, particularly as Russian storage facilities are filling up very rapidly to capacity, above all for crude. With quarter end out of the way, and despite falling oil prices, US, Eurozone and UK govt bond yields are likely to see renewed upward pressure, but the key question for the quarter is when credit markets, which rallied hard to end the quarter, will wake up to the reality of higher rates, higher inflation and lower profits and impaired margins – see attached credit spread charts.

** Eurozone – March CPI **

– While the French and Italian national HICP readings were broadly in line with forecasts (even if Italian national CPI was higher than expected), the much higher than forecast German and Spanish prints suggest headline Eurozone CPI will be well above the consensus for 1.9% m/m 6.7% y/y, and more than likely to reach 7.0% or even a tad higher. But as the contribution from energy, and to a lesser extent was the primary driver of both those upside misses, core CPI may well be broadly in line with the expected 3.1% y/y from February’s 2.7%, even if pre-war pipeline second round effects suggest that this will keep on climbing during Q2, this will at least provide some crumbs of comfort for ECB doves.

** U.S.A. – March labour data **

– As the fresh record in Tuesday’s US Consumer Confidence ‘Labour Differential’ attests, US labour demand remains very strong, and the labour market is as tight as a drum. Today’s report is projected to see a 495K rise in Private Payrolls (Feb 654K) and a headline rise of 490K (Feb 678K), the Unemployment Rate to dip 0.1 ppt to 3.7%, and Average Hourly earnings to post a 0.4% m/m rise to push the y/y rate up to 5.5% from 5.1%. Despite the Fed stepping up its hawkish narrative, it continues to assume that the tightness of the labour market will be alleviated once the Labour Force Participation Rate recovers to its pre-pandemic of 63.4%, with a small improvement seen in today’s report from 62.3% to 62.4%. To an extent the Fed’ assumption is understandable, but with demographic changes to the workforce having been accelerated by the pandemic, and substantive changes in skills demands as a rapidly changing economic environment attempts to reach some sort of state of vague equilibrium, this assumption looks at best tenuous, if not a forlorn hope. The latter may well be borne out by the fact that the Underemployment Rate (last 7.2%) is likely to get closer to its previous cyclical low at 6.9%.