Macroeconomics: The Day Ahead for 22 March

There remains no light at the end of the tunnel in terms of the war in Ukraine, only the horrific spectre of death and destruction, and in turn putting further upward pressure on a very broad array of commodity and energy prices, and by extension govt bond yields. The day’s data schedule is busier than Monday, but is unlikely to impinge on markets, with the UK PSNB (budget) to digest ahead of CBI Industrial Trends survey, while Canada has producer price measures and the US Richmond Fed surveys. The BIS Innovation Summit features a busy run of major central bank speakers, but it is the Bundesbank, ECB & Chicago Fed joint annual conference that may feature rather more in terms of policy related comments, even if the salient point remains that monetary policy is wholly unsuitable to combat supply related inflation pressures. Following on from Egypt’s 13.7% EGP devaluation and 100 bps rate hike, and a much sharper than expected 250 bps rate hike in Ghana to combat a sharp slide in the Cedi, the CEE/EM central focus turns to rate decisions in Hungary, with a 100 bps hike expected in order to catch the Refi rate up with the 1-week Depo rate. Nigerian rates were kept on hold at 11.50% in an early decision, and Paraguay’s BCP may have to revert to sharper rate hikes than the 25 bps moves seen thus far this year, given that CPI has rebounded sharply to 9.3% y/y in February after dipping to 6.8% in December. Aluminium Corp of China aka Chalco heads the run of corporate earnings, while there are govt bond auctions in Germany (5-yr) and Netherlands (7-yr). The fact that US 2-yr yields crossed above 2.0% yesterday, as it behoves fund managers to rethink their fixed income and risk asset allocations, as the opportunity cost of holding short-dated less volatile assets continues to improve, in contrast to the deteriorating profile for long duration and riskier credit assets.

While volatility is very much baked in the cake, and markets hypersensitive to rumour and often misinterpreted headlines, this morning’s flash slide in oil prices without any ostensible headline triggers, serves as a reminder of just how thin underlying liquidity is, with anomalous flows capable of triggering very sharp moves in prices.

As was always going to be the case, the divergence in G7 central bank rates is spilling over into FX performance, perhaps most notably for the JPY, with the prospect of the BoJ resolutely sticking to its super easy monetary policy stance as others tighten heavily outweighing its safe haven status. While the focus is on USD/JPY, it is the perhaps anomalous and very sharp underperformance vs. the other traditional safe haven the CHF (see CHF/JPY chart), even though the SNB will also be lagging its G7 peers on rates. However this is less surprsiing, when one considers ‘real’ rate differentials, with Swiss headline CPI at 2.2% y/y and core at 1.3%, while Japan’s core CPI lags far behind at -0.5%, per se implying a great deal more scope, even pressure, for the SNB to tighten policy. In the EM space, the examples of Egypt and Ghana underline the pressure on the most indebted nations, above all those that are dependent on commodity and/or energy imports. That said, the outperformance of some commodity exporting countries’ currencies, such as South Africa, with a very weak domestic economy (sky high Unemployment, weak growth and heavily indebted), may prove to be a trap in the longer run, particularly given its vulnerability to food and energy prices pressures.