Macroeconomics: The Day Ahead for 15 March

Today’s schedule of data and events offers some distractions from the conflicting images of the Russian bombardment of the civilian populations that remain in the cities in Ukraine. On the one hand there are the tidbits of hope for a ceasefire emanating from the negotiations between the two sides, and then throw into all of this perceived threats to China for perhaps supporting Russia with arms, as well as the surge in infection rates in China (also being seen in Germany and other parts of Europe), prompting lockdowns in Shenzhen and Shanghai. There are China’s activity data and PBOC 1-yr MTLF operation and UK labour data to ponder, while ahead lie Germany’s ZEW survey, OPEC’s monthly Oil Market report, US PPI and NY Fed Manufacturing and a speech by ECB’s Lagarde. Earnings reports include supply chain developments bellwether Volkswagen, along with Alimentation Couche-Tard and Southern Copper Corp Peru, while there are govt bond auctions in Germany (2-yr), U.K. (I-L 10-yr) and Finland (9-yr). Markets remain extremely volatile, and the strains all too obvious in money market rates and credit spreads (see attached charts), and while most reports have focussed on losses on Russia related asset, the risk of a domino effect remains extraordinarily high. The volatility that we are seeing may not be quite as extreme going forward as it has been in the past 3 weeks, but it puts VAR risk back into the centre ground. The high cost of options hedging will impact volume of cover for fund portfolios, and commercial hedging in commodities, and of course the less hedging that there is, the greater the vulnerability to shocks.

Germany’s ZEW Expectations is forecast to collapse to 5.0 from 54.3, and the Current Situation slide to -22.5 from -8.1 due to the war in Ukraine. The UK labour data were once again stronger than expected, with Payrolls surging 275K, and the Unemployment Rate dropping to 3.9% from 4.1%, while Average Earnings rose 4.8% y/y, though the ex-Bonus reading of 3.8% y/y (vs. expected / prior 3.7%) suggests that basic pay pressures are more muted, and of course still lagging well behind inflation. China’s array of activity data proved to be much stronger than expected, underlining that the anticipated drag from a combination of the Lunar New Year holidays and the Olympics was much smaller than forecasters assumed, which in truth had been flagged by the authorities urging many companies not to shut down for the LNY holidays. Nevertheless only Fixed Asset Investment (12.2% y/y vs. prior 4.9%) picked up vs. December, and finally showing the benefit of the various stimulus measures both Public (14.1% y/y) and Private (11.4%), and notable for the fact that there were very adverse base effects given that Jan-Feb 2021 represented the peak of the pandemic recovery (35.0%). By contrast Industrial Production and Retail Sales slipped vs. December, though proved to be stronger than expected despite equally adverse base effects. The more important question is how much of the ‘surge’ in the surveyed Unemployment Rate (5.5% vs. 5.1%) is related to the property sector woes, with long supply chains perhaps bearing as much of the brunt as the construction sector itself. However with the latest round of lockdowns and the surge in infection rates, this ostensible strength is likely to be short lived.