Macroeconomics: The Day Ahead for 23 March

Inflation data dominates the statistical schedule, with CPI data to digest from the UK, Singapore and South Africa, while ahead lie UK ONS House Prices, US New Home Sales and perhaps most poignantly in the light of the ongoing war in Ukraine: provisional Eurozone Consumer Confidence, which given the steep fall in the Netherlands may well drop more than the expected drop to -12.9 from -8.8. Central bank speakers are again plentiful, with Bailey, Lagarde and Powell all speaking at the BIS Innovation Summit, but it will be UK Chancellor Sunak’s ‘Spring Statement’ on the Budget which will perhaps attract more attention. The emergent narrative around the equity market rally looks to be as bad a case of ‘cakeism’ as the Fed argument that it can hike rates aggressively without harming growth or labour demand, and just as a reminder this is the self-same Fed that not many months ago was arguing that inflation would be transitory, and that hiking rates would derail growth. The rationale being proposed is that equities are a good inflation hedge because companies have considerable pricing power, and can therefore maintain margins and profits, and clearly attaches a lot of credibility to that Fed’s newly formed argument that rates hikes will not derail robust growth and labour demand, and blithely tramples over any demand destruction issues, let alone increased borrowing costs. As noted below, this is more a case of markets struggling to break the shackles of heavily conditioned TINA and FOMO ‘buy the dip’ responses.

** U.K. – Spring Budget Statement **

– While the cost of living crisis in the UK remains very real (as the 30-yr high in today’s CPI underlined), and his decision to increase National Insurance (NI) by 1.25% (to fund health and social care) as of April only serves to compound the pressure on UK households, Sunak has been at pains to push back on hopes/expectations of some relief measures. That said, yesterday’s PSNB data (despite the higher than expected outturn), suggest that the current fiscal year budget will be some £30 Bln less than the OBR had forecast back in October, thanks to much higher than expected tax receipts, though rising inflation and interest rates also imply that FY2022/23 borrowing will be £20 bln than the October Budget assumed. The consensus appears to be that there will be a larger increase both in pensions and working-age benefits, a hike in basic income tax (and perhaps NI) threshold, a 5p/litre cut in fuel duty, as well as an extension of VAT cuts for the leisure/hospitality sector. It is also expected that there will be a restructuring of current (temporary) business investment tax relief measures. As ever, close attention will need to be paid to the usual smoke and mirrors tactics of repackaging previously announced measures as ‘new’ spending, and to any other caveats, exclusions or accompanying provisions in the fine print of press releases after the statement.

While the primary focus on the war in Ukraine is absolutely necessary, coupled with the messaging from central banks on policy outlooks, there are however risks in losing sight of other moving parts with longer-term implications, above all because markets’ reaction function has been so dulled by a decade of ‘largesse to excess’, and also conditioned (as in Pavlov) to respond in ways, which may well prove to be a case of ‘being hoist by one’s own petard’. Put in as simple terms as possible, if everything can be weaponized, as would appear now to be the case: e.g. food, energy and raw materials supplies; and asset seizure is not just reserved for the worst form of criminals (be that rogue states, terrorists or murderers; people, drug or weapons traffickers), then there is in principle no such thing as a safe asset, and the underlying idea of free capital flows (which has long been an illusion) a myth on which the world can no longer dine out. Of rather greater significance in the short-term is that those that did hedge their portfolios for this kind of volatility and adverse environment are doubtless rubbing their hands in delight, and may well have been able to earn extra income by trading the associated options. But at some point those options will be coming up to expiry, and the rolling of those hedges will be far more expensive, and doubtless have to be reduced in size terms to account for the higher cost. In other words there will be less protection, and per se greater vulnerability to any shocks.