• Fed Chair Powell is the latest Fed official to look through the Ukraine crisis; we believe the Fed hikes 25 bp at the March 15-16 FOMC; ISM services PMI will be the data highlight; the Fed released its Beige Book report for the March 15-16 FOMC meeting; BOC hiked rates 25 bp to 0.50%, as expected
  
• MSCI and FTSE Russell are both cutting Russia from their major equity indexes; Moody’s and Fitch both cut their sovereign rating for Russia two full steps; eurozone reported January PPI; the energy price surge is making the ECB’s policy decisions even more difficult; BOE officials are concerned about the impact from Ukraine; Turkey reported February CPI
  
• BOJ officials continue to focus on wages; Australia reported mixed data overnight; Caixin services and composite PMI readings were softer than the official ones; Malaysia kept rates steady at 1.75%, as expected; OPEC+ agreed to increase oil output by 400k bbl/day in April; it’s not just oil, as coal prices surge
  

The dollar remains firm as markets await fresh drivers. DXY is trading higher near 97.60 and the next big target is the May 25 2020 high near 99.975. The euro finally broke below $1.11 but there has been little follow-through. Further losses are likely as sentiment sours further. Sterling is trading back below $1.34 after a brief time above it. USD/JPY traded today at the highest since mid-February near 115.80 despite ongoing risk-off impulses, while EUR/CHF is trading just below 1.02. Between the ongoing risk-off impulses and the Fed outlook for tightening, we believe the dollar uptrend remains intact.

AMERICAS

Fed Chair Powell is the latest Fed official to look through the Ukraine crisis. Powell said he is inclined to support a 25 bp hike in March. He added that if inflation stays hot, the Fed could hike 50 bp later. He said it’s not known yet how the Ukraine crisis will affect the outlook for rates but stressed that it’s appropriate to move ahead as inflation is too high. This is the sensible approach that we think is Fed consensus. Yes, Bullard and Waller are talking about 50 bp in March but when all is said and done, 25 bp makes the most sense. As Powell implied, they can move to 50 bp in May (or sooner) if needed but they need more information to make such a decision. Powell testifies before the Senate today while Williams speaks. The media embargo then goes into effect Friday at midnight.

We believe the Fed hikes 25 bp at the March 15-16 FOMC. Given the heightened uncertainty surrounding the Ukraine crisis, we think 50 bp would simply be too aggressive at the moment. WIRP suggests around 25% odds of a 50 bp move and so the Fed does not have to feel that it has to do 50 bp just to meet market expectations. Then, the Fed can wait nearly two months until the May 3-4 FOMC meeting to see how the crisis has impacted the U.S. economy before deciding on its next move.

ISM services PMI will be the data highlight. It is expected at 61.1 vs. 59.9 in January. Also keep an eye here on employment and prices paid components, which stood at 52.3 and 82.3 in January, respectively. Recall ISM manufacturing PMI came in stronger than expected earlier this week at 58.6 vs. 57.6 in January. February Challenger job cuts and January factory orders (0.7% m/m expected) will also be reported. Weekly jobless claims are also expected to show continued improvement in the labor market.

The Fed released its Beige Book report for the March 15-16 FOMC meeting. On overall economic activity: “Economic activity has expanded at a modest to moderate pace since mid-January.” On the labor market: “Contacts reported they expect the tight labor market and consequent strong wage growth to continue, though a few Districts reported signs of wage growth moderating.” On prices: “Firms reported an increased ability to pass on prices to consumers; in most cases, demand has remained strong despite price increases. Firms reported they expect additional price increases over the next several months as they continue to pass on input cost increases.”

Bank of Canada hiked rates 25 bp to 0.50%, as expected. The bank said it would maintain the size of its balance sheet steady for now but said it expects rates will need to rise further. It added that inflation has become more pervasive. The bank said it would “be considering” when to start the process of shirking the balance sheet but gave no further details besides saying it would “complement” its rate hikes. Governor Macklem should offer more insight in a speech and press conference today. The hawkish forward guidance was not at all surprising and so it hasn't really changed market expectations. The swaps market still sees 175 bp of total tightening over the next 24 months that would take the policy rate up to a peak of 2.25%.

And so BOC becomes the fourth major central bank to hike rates. The Fed is next, likely followed by the RBA in H2. The ECB will likely be the next to follow, though we continue to think that is a 2023 story. The Riksbank and SNB will be amongst the laggards, and the BOJ will most likely be the last of the majors to hike rates.

EUROPE/MIDDLE EAST/AFRICA

MSCI and FTSE Russell are both cutting Russia from their major equity indexes. MSCI said that an overwhelming majority of market participants views Russia as “uninvestable” and so its securities will be removed from its EM indexes effective March 9. FTSE Russell said it will cut Russia index constituents listed on the Moscow Exchange effective March 7. Trading in 28 global depositary receipts for Russian companies have been suspended on the LSE “in connection with events in Ukraine, in light of market conditions, and in order to maintain orderly markets.” All eyes turn to Russian bonds now, as FTSE Russell said it is evaluating the impact of sanction. JP Morgan also confirmed it is reviewing Russia’s inclusion in its bond indexes. It’s hard to imagine that similar ejections won’t be seen here as well.

Moody’s and Fitch both cut their sovereign rating for Russia two full steps. Moody’s cut its rating to B3 from Baa3, citing “heightened risk of disruption to sovereign debt repayment given the severe and coordinated sanctions and significant concerns around Russia’s willingness to service its obligations.” Fitch cut its trading to B from BBB and placed the rating on negative watch, suggesting further cuts are likely, and citing weakening external and public finances, slowing growth, elevated domestic and geopolitical risk, and the potential for further sanctions. Fitch added that sanctions have “heightened macro-financial stability risks” are a huge shock to Russia’s credit fundamentals. S&P last week cut Russia by only one notch to BB+ from BBB- and so it has some catching up to do.

Eurozone reported January PPI. It surged 30.6% y/y vs. 27.3% expected and a revised 26.3% (was 26.2%), which suggests upside risks remain for CPI in the coming months. As it is, headline inflation came in at a record high 5.8% y/y in February vs. 5.1% in January. With pipeline price pressures only getting worse, we have to start thinking about a 6 or 7 handle for CPI inflation in the coming months as energy prices continue to rise.

The energy price surge is making the ECB’s policy decisions even more difficult. Officials have acknowledged both the growth and inflation risks and so there are no easy answers. The bank is likely to deliver a balanced hold next Thursday. It should allow PEPP to end as scheduled next month whilst underscoring that it stands ready to use APP more aggressively in the coming months if circumstances warrant. Madame Lagarde will make great efforts not to get pinned down on any timeframe for tightening since the situation is still evolving. Swaps market is pricing in likely liftoff in Q4, with nearly 40 bp of tightening seen over the next 12 months followed by 55 bp more over the following 12 months. We suspect these expectations will be pared back as the Ukraine crisis persists.
crisis.

Eurozone reported final services and composite PMIs. Both were revised down three ticks from the preliminaries to 55.5. Looking at the country composites, Germany fell to 55.6 vs. 56.2 preliminary and France fell to 55.5 vs. 57.4 preliminary. Italy and Spain composites were reported for the first time and both rose sharply to 53.6 and 56.5. Both were tipping close to recession in January at 50.1 and 47.9, respectively, and so the improvement is welcome.

Bank of England officials are concerned about the impact from Ukraine. Deputy Governor Cunliffe warned that the Ukraine crisis may hurt growth, stressing “The events of the last few days have led to an abrupt shift in our expectations of the future and an increase in uncertainty.” Elsewhere, external MPC member Tenreyro said she expects “upside surprises on inflation.” For those keeping score at home, Bailey, Pill, Cunliffe, Tenreyro, and Broadbent voted to hike 25 bp while Saunders, Ramsden, Mann, and Haskel voted to hike 50 bp.

Bank of England tightening expectations remain restrained. WIRP still suggests a 25 bp hike March 17 is fully priced in but odds of a 50 bp move have fallen to around 20% vs. nearly 50% last month. Total tightening of 125 bp is priced in over the course of 2022 that would take the policy rate up to 1.75% at year-end followed by an early 2023 hike to an expected peak around 2.0%. The U.K. reported final services and composite PMIs and were both revised down three ticks from the preliminaries to 60.5 and 59.9, respectively.

Turkey reported February CPI. Headline inflation came in at 54.4% y/y vs. 52.50% expected and 48.69% in January, while core came in at 44.05% y/y vs. 42.55% expected and 39.45% in January. Headline is the highest since April 2002 and further above the 3-7% target range. PPI rose a whopping 105% y/y, pointing to upside risks for CPI in the coming months. Next policy meeting is March 17 and rates are expected to remain steady at 14.0%. Until a monetary policy anchor has been established, inflation will continue to rise. After a brief period of stability, the lira has resumed weakening. Here too, with that policy anchor, there is little hope for exchange rate stability.

ASIA

Bank of Japan officials continue to focus on wages. Board member Junko Nakagawa said “I don’t think that simply hitting 2% inflation is sufficient. We are aiming for a virtuous economic cycle where wages and inflation rise in a sustainable manner.” This echoes similar statements from Governor Kuroda earlier this year, as BOJ policymakers continue to push back against any market notions of BOJ tightening. Headline and core (ex-fresh food) inflation have been creeping higher but this is due largely to higher energy prices. Wage growth (both nominal and real) is in negative territory and so BOJ officials see no need for concern yet. January cash earnings data will be reported next Tuesday and should show continued weakness. Japan reported final services and composite PMIs and were both revised more than a point higher from the preliminaries to 44.2 and 45.8, respectively. The economy should continue to improve as we move into Q2 as the impact of omicron ebbs.

Australia reported mixed data overnight. Final services and composite PMIs were revised around a point higher from the preliminaries to 57.4 and 56.6, respectively. However, January building approvals slumped -27.9% m/m vs. -3.5% expected. Trade data were also mixed, with exports coming in at 8% m/m vs. 6% expected but imports coming in at -2% m/m vs. 3% expected. Exports are likely to remain strong due to surging coal prices (see below) but the weakness in imports bears watching. For now, recent data support the RBA’s decision to maintain a dovish stance. WIRP suggests liftoff is still likely to be seen at the August 2 meeting.

Caixin services and composite PMI readings were softer than the official ones. Services PMI came in at 50.2 vs. 50.7 expected and 51.4 in January. Because its manufacturing PMI came in stronger than expected earlier this week at 50.4 vs. 49.1 in January, the Caixin composite PMI remained steady at 50.1. This compares to the official composite PMI, which rose to 51.2 vs. 51.0 in January. Despite ongoing stimulus efforts, the economy is losing momentum under the weight of its Covid Zero policies. We expect further measures to boost growth.

Bank Negara Malaysia kept rates steady at 1.75%, as expected. The bank noted that its current policy stance remains “appropriate and accommodative” and will continue to be determined by incoming data. However, it warned that “The unfolding developments surrounding the military conflict in Ukraine, however, have emerged as a key risk to global growth and trade prospects, commodity prices and financial market conditions.” January CPI came in lower than expected at 2.3% y/y vs. 3.2% in December and was the lowest since September. While the central bank does not have an explicit inflation target, easing price pressures will allow it to keep rates on hold for the time being. Next policy meeting is May 11 and while a lot can happen between now and then, we suspect rates will be kept steady then as well. Bloomberg consensus sees steady rates through H1 followed by 50 bp of tightening in H2.

COMMODITIES

OPEC+ agreed to increase oil output by 400k bbl/day in April. OPEC+ could and should try to do something about high oil prices but it's choosing not to. This could end up backfiring. Of note, Russia produces around 10 mln bbl/day of crude and exports around 5 mln. That is a lot of oil that needs to be replaced and a paltry 400k bbl/day increase from OPEC+ just won't cut it. Reports suggest Mexico Energy Minister Rocio Nahle raised the topic of Russian oil production but that there was no real discussion of the matter. Perhaps OPEC+ is hoping that the impact of the Ukraine crisis on oil will blow over quickly. Next OPEC+ meeting is scheduled for March 31 and if oil prices remain elevated, the group will have to take stronger measures then to lower prices.

It’s not just oil, either, as coal prices surge. Europe consumes a lot of Russian coal and as substitutes are sought out, global coal prices have also been driven up to record highs. That has helped AUD to outperform as it trades at the highest level since November just above 0.73. It is coming up on a test of the 200-day moving average near .7325 and a break above would set up a test of the October 2021 high near .7555.