Drivers for the Week of March 20, 2022

March 20, 2022
Here's a look at the main drivers in Developed Markets this week.
  • Market are still digesting last week’s FOMC meeting; Chair Powell was upbeat at his press conference; market pricing for Fed tightening has adjusted accordingly; U.S. rates continue to move in the dollar’s favor; Fed messaging after the FOMC meeting has been hawkish; most of President Biden’s Fed nominations will advance to a full Senate vote; regional Fed manufacturing surveys for March will continue to roll out
  • There have been no significant developments in Ukraine in recent days; ECB officials continue to send hawkish signals; preliminary eurozone March PMI readings will be reported Thursday; U.K. Chancellor Sunak gives his budget statement Wednesday; U.K. reports some key data; sterling took a hit from the dovish message that accompanied last week’s 25 bp hike to 0.75%; Norges Bank meets Thursday and is expected to hike rates 25 bp to 0.75%; last week’s hawkish pivot by the Riksbank is worth discussing; SNB meets Thursday and is expected to keep rates steady at -0.75%
  • Japan reports some key data this week; BOJ minutes from the January 17-18 meeting will be released Thursday

AMERICAS

Market are still digesting last week’s FOMC meeting. The Fed Funds rate was hiked 25 bp to a range of 0.25-0.50%, as expected. The one dissent was from Bullard, who favored a 50 bp move. The Fed also delivered a very hawkish shift in the Dot Plots, with the median Fed Funds rate seen at 1.9% at end-2022 vs. 0.9% in December. The median Fed Funds rate is seen at 2.8% at both end-2023 and end-2024, up from 1.6% and 2.1% in December, respectively. The Fed is clearly sending the signal that this will not be a short, mild tightening cycle. The long run rate is seen at 2.4% but the Dot Plots suggest easing won’t happen until 2025. Lastly, the Fed said it would start reducing its balance sheet at a “coming” meeting. Chair Powell later confirmed that an announcement could come as soon as the next meeting May 3-4. If so, we believe implementation could come as soon as the June 14-15 meeting.

Chair Powell was upbeat at his press conference. He said the economy is very strong, with “tremendous” jobs momentum. Powell stressed that the economy is well positioned to withstand tighter monetary policy and that it is likely to flourish with less accommodative policy. He added that the Fed will be looking at the inflation data as they come in and wants to see m/m gains come down. Lastly, Powell said that if it becomes appropriate to move more quickly, the Fed will do so. Equity markets seemed to focus more on his rosy outlook for the economy than on the rather hawkish signals he was sending.

Market pricing for Fed tightening has adjusted accordingly. WIRP is pricing in a 25 bp hike at each of the six remaining meetings this year, with nearly 70% odds of a 50 bp move at one of those meetings. Swaps market is pricing in 200 bp of tightening over the next 12 months followed by another 25 bp over the following 12 months that would see the Fed Funds rate peak near 2.5%. We have been calling for such a move for weeks now, and we still see risks that this peak moves closer to 3% in the coming weeks.

U.S. rates continue to move in the dollar’s favor. The 2-year yield traded at 2.0% after the FOMC meeting but has since eased to 1.94%. However, the differentials with Germany and Japan are making new cycle highs. The U.S. 10-year yield traded as high as 2.24% after the FOMC meeting but has since eased to 2.15%. As the extent of the Fed’s hawkishness becomes clearer and clearer in the coming days, U.S. yields should continue to move higher and support the dollar.

Fed messaging after the FOMC meeting has been hawkish. Waller said that the Ukraine crisis kept him from pushing for a 50 bp hike last week but stressed that the Fed should consider 50 bp hikes at the coming meetings and start shrinking its balance sheet by July. Bullard said he favored raising rates above 3% by year-end. Kashkari admitted he was wrong about inflation and now backs stronger action to contain it. Barkin said he is open to 50 bp moves if price pressures fail to ease or inflation expectations move up meaningfully. Fed speakers will be plentiful this week and are expected to sound equally hawkish. Bostic and Powell both speak Monday. Williams, Daly, and Master speak Tuesday. Powell, Daly, and Bullard speak Wednesday. Kashkari, Waller, Evans, and Bostic speak Thursday. Daly, Waller, Williams, and Barkin speak Friday.

Most of President Biden’s Fed nominations will advance to a full Senate vote. Last week, the Senate Banking committee approved Powell by a 23-1 vote for a second term as Chair and approved Brainard by a 16-8 vote for Vice Chair. For the two nominations to the Board of Governors, Jefferson was approved 24-0 but the committee was deadlocked 12-12 for Cook and so she will require an additional procedural vote on the Senate floor in order to advance. There has been no announcement yet on who would replace Sarah Bloom Raskin as nominee for Vice Chair for Supervision.

Regional Fed manufacturing surveys for March will continue to roll out. Richmond Fed reports Tuesday and is expected at 2 vs. 1 in February. Kansas City Fed reports Thursday and is expected at 21 vs. 29 in February. So far, Empire Survey came in at -11.8 vs. 3.1 in February and Philly Fed came in at 27.4 vs. 16.0 in February. S&P Global (formerly Markit) preliminary March PMI readings will also be reported Thursday. Manufacturing is expected at 56.5 vs. 57.3 in February, services is expected at 56.0 vs. 56.5 in February, and the composite PMI is expected at 54.2 vs. 55.9 in February. ISM PMI readings will be reported next week.

Weekly jobless claims will be of interest. That’s because continuing claims will be for the BLS survey week containing the 12th of the month, and are expected at 1.400 mln vs. 1.419 mln the previous week. Initial clams are expected at 211k vs. 214k the previous week, which was the lowest since the end of December. Consensus for March NFP currently stands at 450k vs. 678k in February, with the unemployment rate seen falling a tick to 3.7%. Many more clues will be revealed in the coming days.

Other minor data will be reported throughout the week. February Chicago Fed National Activity Index (0.50 expected) will be reported Monday. New home sales (1.3% m/m expected) will be reported Wednesday. Durable goods orders (-0.6% m/m expected) will be reported Thursday. Pending home sales (1.0% m/m expected), and final March University of Michigan consumer sentiment will be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

There have been no significant developments in Ukraine in recent days. While some vaguely positive headlines regarding Ukraine have emerged, we remain skeptical of any diplomatic breakthroughs being seen in the near-term. Some military analysts are now talking about a war of attrition, which suggests that neither side is yet ready to make significant concessions. While Zelensky renewed his offer to negotiate directly with Putin, Russia continues with its indiscriminate bombing campaign across Ukraine.

European Central Bank officials continue to send hawkish signals. Last week, Knot said he doesn’t rule out two hikes this year if the medium-term outlook for inflation continues to move higher. He also said he favors an end to QE in July, which would then allow for liftoff three months later. Both President Lagarde and Chief Economist Lane cited low eurozone unemployment as a major factor why inflation was unlikely to return to pre-pandemic rates near 1%. WIRP currently shows liftoff is priced in for the July 21 meeting. Looking ahead, the swaps market is pricing in 70 bp of tightening over the next 12 months, followed by another 50 bp over the following 12 months.

Preliminary eurozone March PMI readings will be reported Thursday. Headline manufacturing is expected at 56.0 vs. 58.2 in February, services is expected at 54.2 vs. 55.5 in February, and the composite is expected at 53.8 vs. 55.5 in February. Looking at the country composite PMIs, Germany is expected at 53.8 vs. 55.6 in February and France is expected at 54.0 vs. 55.5 in February. Weakness likely reflects some impact from the Ukraine crisis and this is likely to carry over into April. Italy and Spain will be reported with the final PMI readings due out in early April. February eurozone M3 data will also be reported Friday and is expected to slow a tick to 6.3% y/y.

There will be several other key eurozone sentiment readings. March eurozone consumer confidence will be reported Wednesday and is expected at -12.9 vs. -8.8 in February. French business confidence will be reported Thursday and is expected to drop two points to 110. Italy reports March consumer and manufacturing confidence Friday, with both expected to fall from February to 108.0 and 111.8, respectively. German IFO business climate will be reported Friday and the headline is expected at 94.2 vs. 98.9 in February. Current assessment is expected at 96.6 vs. 98.6 in February, while expectations is expected at 92.0 vs. 99.2 in February.

U.K. Chancellor Sunak gives his budget statement Wednesday. He will be under tremendous pressure to deliver some relief to U.K. household finances that are already buckling under high energy prices that will go even higher this spring, as well as a planned payroll tax hike to help fund the National Health Service. Ahead of the statement, Sunak hit the airwaves and pledged “I want people to know, they should be reassured, I will stand by them. Where we can make a difference, of course we will.” The good news is that strong growth has helped boost revenues and limit outlays, which gives Sunak some room to provide some limited relief with potential cuts in fuel and energy taxes as well as increases in social spending. Sunak has ruled out any changes to the payroll tax hike planned for April. February public sector net borrowing will be reported Tuesday and ex-banking is expected at GBP8.1 bln vs. -GBP2.9 bln in January.

U.K. reports some key data. February CPI data will be reported Wednesday. Headline is expected at 6.0% y/y vs. 5.5% in January, CPIH is expected at 5.4% y/y vs. 4.9% in January, and core is expected at 5.0% y/y vs. 4.4% in January. February retail sales will be reported Friday. Headline sales are expected at 0.6% m/m vs. 1.9% in January, while sales ex-auto fuel are expected at 0.5% m/m vs. 1.7% in January. It remains to be seen whether consumption can hold up in the face of still-rising inflation, rate hikes, and many other headwinds.

Preliminary March U.K. PMI readings will be reported Thursday. Headline manufacturing is expected at 56.9 vs. 58.0 in February, services is expected at 58.0 vs. 60.5 in February, and the composite is expected at 57.5 vs. 59.9 in February. Elsewhere, U.K. CBI will release the results of its March surveys. Industrial trends survey will be reported Tuesday, with total orders expected at 16 vs. 20 in February and selling prices expected at 79 vs. 77 in February. Its distributive trades survey will be reported Thursday, with retailing reported sales expected at 10 vs. 14 in February.

Sterling took a hit from the dovish message that accompanied last week’s 25 bp hike to 0.75% by the Bank of England. Cable remains stuck below $1.32 and is likely to struggle from the subtle shift in BOE messaging. The vote was 8-1, with Cunliffe dissenting in favor of no hike. The forward guidance was changed as the bank said further tightening “might be” appropriate in the coming months vs. “likely” at the previous meeting in February. The bank also warned that the likely hit to U.K. household incomes will be “materially larger” than feared at the previous meeting. Before the Ukraine crisis, the BOE expected inflation to peak around 7.25% in April but now expects it to accelerate to about 8% by the end of June, with greater upside risks later this year. Updated macro forecasts won’t be seen until the May 5 meeting.

Bank of England tightening expectations haven’t changed much, however. WIRP suggests a hike at the next meeting May 5 is fully priced in, with very low odds of a 50 bp move then. That is true for pretty much every remaining meeting in 2022. Swaps market sees the policy rate at 2.0% over the next 12 months, with some risks of another 25 bp of tightening over the following 12 months that would see the policy rate peak near 2.25%. Cunliffe speaks Tuesday, Bailey speaks Wednesday, and Mann speaks Thursday.

Norges Bank meets Thursday and is expected to hike rates 25 bp to 0.75%. At the last policy meeting January 20, Governor Olsen confirmed existing forward guidance by noting that “Based on the Committee’s current assessment of the outlook and balance of risks, the policy rate will most likely be raised in March.” New macro forecasts and an updated rate path will be released at this meeting. Swaps market is pricing in a terminal policy rate of 1.75% over the next 24 months, which is consistent with the central bank’s December expected rate path. Swaps market is pricing in nearly 100 bp of tightening over the next 12 months. We concur and see the bank continuing with its current pace of quarterly 25 bp hikes.

Last week’s hawkish pivot by the Riksbank is worth discussing. Governor Ingves surprised markets by saying the bank is likely to hike rates before its current forward guidance for H2 24 liftoff that came with the last meeting February 10. When asked about possible 2022 liftoff, he said “we cannot rule anything out.” He noted that “The Swedish economy is doing well, but at the same time uncertainty has increased. That uncertainty naturally increases with the ongoing war in Ukraine.” Next policy meeting is April 28 and markets should be prepared for a hawkish shift in the bank’s expected rate path. However, we think the bank is unlikely to signal 2022 liftoff despite the comments from Ingves. Swaps market is pricing in nearly 100 bp of tightening over the next 12 months, which seems too aggressive.

Swiss National Bank meets Thursday and is expected to keep rates steady at -0.75%. At the last policy meeting December 16, the bank delivered a dovish hold. The SNB still characterized the franc as “highly valued” and pledged to continue FX interventions as necessary. EUR/CHF was trading near 1.04 then. After the Ukraine crisis drove this pair briefly below 1.0, it has since recovered to around 1.04. We expect upward revisions to the inflation forecasts, but the trajectory should continue to suggest liftoff won’t be seen until 2024 at the earliest. Of note, forecasts for 2024 will be added at this meeting and will be a key part of the bank’s forward guidance. Swaps market is pricing in over 50 bp of tightening over the next 12 months, which seems too aggressive.

ASIA

Japan reports some key data this week. Preliminary February PMI readings will be reported Thursday. February department store sales will also be reported Thursday. March Tokyo CPI will be reported Friday. Headline is expected to pick up two ticks to 1.2% y/y, while core (ex-fresh food) is expected to pick up two ticks to 0.7% y/y. If so, core would still remain well below the 2% target and certainly justifies the Bank of Japan’s ongoing ultra-dovish stance. Last week, national CPI for February was reported. Headline came in at 0.9% y/y and core came in at 0.6% y/y, both up from January. Core inflation was the highest since February 2020 but still well below the 2% target. However, much of this is due to energy as CPI ex-fresh food and energy came in at -1.0% y/y.

Bank of Japan minutes from the January 17-18 meeting will be released Thursday. The bank delivered a dovish hold then. Last Friday, the bank also delivered a dovish hold and minutes to that meeting will be released May 9. Lat week, Governor Kuroda continued to play down the current inflation spike, noting “We don’t know what April’s inflation rate may be, but there’s a possibility it’ll be around 2%. But that in no way signifies there will be a revision of our current monetary policy.” Kuroda again stressed that the situation in Japan is very different from the U.S. and eurozone and that “There’s absolutely no need for Japan to raise rates just because others are doing it.” The next policy meeting April 27-28 will be very important because updated macro forecasts will be released and FY24 will be added to the forecast horizon. We expect the current dovish tone to be maintained then.

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