Drivers for the Week of March 13, 2022

March 13, 2022
Here's a look at the main drivers in Developed Markets this week.
  • Two day FOMC meeting ends with a decision Wednesday; new macro forecasts and Dot Plots will be released; inflation data will remain in focus; retail sales data Wednesday will also be important; regional Fed manufacturing surveys for March will start rolling out; Canada reports some key data
  • Eurozone has a fairly quiet week; U.K. reports some key data; BOE meeting ends with a decision Thursday
  • The two day Bank of Japan meeting ends with a decision Friday; Japan has a heavy data week; Australia reports February jobs data Thursday; RBA tightening expectations remain elevated

AMERICAS

U.S. rates continue to move higher. The 2-year yield traded at 1.76% Friday, the highest since September 2019. That month's high near 1.80% is the next target, followed by the July 2019 high near 1.96%. The 2-year differential with Japan is at a new cycle high near 178 bp, while the 2-year differential with Germany is at 216 bp vs. last Monday's cycle high near 223 bp. That's mostly because the German 2-year yield has spiked after the hawkish ECB decision. Elsewhere, the 10-year yield is trading near 2.0%. With U.S. inflation still rising and the Fed about to tighten, U.S. yields should continue rising and should help the dollar continue to gain.

The two day FOMC meeting ends with a decision Wednesday. WIRP suggests liftoff then is fully priced in after a very brief period below 100%. Risks of a 50 bp move have receded due to the Ukraine crisis. Looking ahead, 175 bp of tightening is priced in over the next 12 months, up from 150 bp at the start of last week, followed by another 25 bp in the following 12 months that would see the Fed Funds rate peak near 2.25%, up from 1.75% at the start of last week. We continue to believe that the terminal Fed Funds rate will have to be much higher. If and when the market comes around to our view, U.S. rates at the short end should continue to rise.

New macro forecasts and Dot Plots will be released. Similar to other central banks, the Fed will likely cut its growth forecasts and hike its inflation forecasts. We also expect a hawkish shift in the Dot Plots. In December, the median Fed Funds was 0.875% for 2022 and 1.625% for 2023. If the Fed Funds futures market is right , we will be above 1.625% by the end of 2021. However, markets will be looking at the Dot Plots to confirm the more hawkish Fed outlook.

Inflation data will remain in focus. February PPI will be reported Tuesday. Headline inflation is expected at 10.0% y/y vs. 9.7% in January, while core inflation is expected at 8.7% y/y vs. 8.3% in January. Last week, February CPI came in as expected but still accelerated from January to multi-decade highs. Core PCE rose 5.2% y/y in January but the February reading won’t be reported until March 31. There are clearly upside risks here.

Retail sales data Wednesday will also be important. Headline sales are expected at 0.4% m/m vs. 3.8% in January, while sales ex-autos are expected at 0.9% m/m vs. 3.3% in January. The so-called control group used for GDP calculations is expected at 0.3% m/m vs. 4.8% in January. Can consumption remain strong in the face of higher energy costs?
Regional Fed manufacturing surveys for March will start rolling out. Empire Survey kicks things off Tuesday and is expected at 7.0 vs. 3.1 in February. Philly Fed reports Thursday and is expected at 15.0 vs. 16.0 in February. February IP will also be reported Thursday and is expected at 0.5% m/m vs. 1.4% in January.

Other minor data will be reported. January TIC data will be reported Tuesday. February import/export prices and January business inventories (1.1% m/m expected) will be reported Wednesday. February building permits (-2.4% m/m expected) and housing starts (3.8% m/m expected) will be reported Thursday. February existing home sales (-6.2% m/m expected) and leading index (0.4% m/m expected) will be reported Friday.

Weekly jobless claims will be of interest. That is because the initial claims data will be for the BLS survey week containing the 12th of the month and are expected at 220k vs. 227k the previous week. Continuing claims are reported with a one-week lag and so next week’s data will be for the BLS survey week. This week, they are expected at 1.48 mln vs. 1.494 mln the previous week. The strong January and February jobs numbers will be a hard act to follow, but markets will be keen to see continued improvement.

Canada reports some key data. February CPI will be reported Wednesday. Headline inflation is expected at 5.5% y/y vs. 5.1% in January, while core common inflation is expected at 2.4% y/y vs. 2.3% in January. January retail sales will be reported Friday. Headline sales are expected at 2.4% m/m vs. -1.8%% in November, while sales ex-autos are expected at 2.2% m/m vs. -2.5% in December. Other minor data will be reported. February housing starts, existing home sales, and manufacturing sales (1.1% m/m expected) will be reported Tuesday, January wholesale trade sales (3.5 m/m expected) will be reported Wednesday.

Bank of Canada should continue to tighten policy. It started a tightening cycle last week with a 25 bp hike to 0.50%. 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. WIRP shows a 25 bp hike at the next meeting April 13 is fully priced in, along with 65% odds of a 50 bp move. Swaps market is pricing in nearly 175 bp of tightening over the next 12 months followed by another 25 bp over the following 12 months that would see the policy rate peaking near 2.50%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a fairly quiet week. German ZEW survey for March will be reported Tuesday. Expectations are expected at 5.0 vs. 54.3 in February, while current situation is expected at -22.5 vs. -8.1 in January. January eurozone IP will be reported Tuesday and is expected at 0.1% m/m vs. 1.2% in December. Trade data will be reported Friday. Despite the ECB’s hawkish hold last week, we do not expect imminent tightening. Swaps market is now looking for 60 bp of ECB tightening over the next 12 months, up from 30 bp at the start of last week, followed by another 55 bp over the following 12 months. This all seems way too aggressive and we think the ECB has lost control of the narrative.

U.K. reports some key data. Labor market data will be reported Tuesday. The unemployment rate for the three months ending January is expected to fall a tick to 4.0%, while employment over the same period is expected at 20k vs. +-38k previously. So far, the economy is recovering smartly from omicron. However, headwinds will be seen in Q2 and so the growth outlook remains cloudy.

The Bank of England meeting ends with a decision Thursday. WIRP suggests a 25 bp hike is fully priced in while odds of a 50 bp move have fallen to pretty much zero vs. nearly 80% in mid-February. Total tightening of 175 bp is priced in over the next 12 months that would take the policy rate up to a peak near 2.25%. The bank released its inflation attitudes survey last Friday that showed inflation expectations at 4.3% for the next 12 months, up sharply from 3.2% in the November survey. This will likely put additional pressure on the BOE to hike but comes at a cost to an already softening growth outlook.

Bank of England tightening expectations remain high. WIRP now suggests a 25 bp hike March 17 is fully priced in, with over 50% odds of a 50 bp move. This comes despite strong pushback against aggressive hikes by both Bailey and Pill last week. Tightening of 150 bp is fully priced in over the course of 2022 that would take the policy rate up to 2.0% at year end. A further 25 bp of tightening in 2023 is nearly priced in that would see the policy rate peak around 2.25%.

ASIA

The two day Bank of Japan meeting ends with a decision Friday. It’s clear from recent official comments that the bank is not too concerned about higher inflation as it is viewed as a temporary spike from energy prices. Instead, some have focused on weak wage growth as a major reason to remain dovish. We fully expect a dovish hold. The April 27/28 meeting should provide more clues to future policy, as FY24 will be added to the forecast horizon then.

Japan has a heavy data week. February trade data will be reported Wednesday. Exports are expected at 20.6% y/y vs. 9.6% in January, while imports are expected at 27.2% y/y vs. 38.7% in January. January core machine orders will be reported Thursday and are expected at -2.0% m/m vs. 3.6% in December. February national CPI will be reported Friday. Headline inflation is expected at 0.9% y/y vs. 0.5% in January, while core (ex-fresh food) inflation is expected at 0.6% y/y vs. 0.2% in January. Of note, CPI ex-fresh food and energy is expected at -1.0% y/y vs. -1.1% in January, underscoring just how much energy prices are responsible for higher headline and core readings. This should support a dovish BOJ decision this week.

Australia reports February jobs data Thursday. Jobs are expected at 49k vs. 12.9k in January, while the unemployment rate is expected to fall a tick to 4.1% and the participation rate is expected to rise a tick to 66.3%. Despite unemployment approaching the 4% area where the RBA believes wage pressures will pick up, the RBA is in no hurry to hike rates. Last week, Governor Lowe said a rate hike by the Reserve Bank of Australia this year is plausible. He stressed that “We don’t have a plan that’s locked in. We are looking at, every month, the data that’s coming in.” Lowe noted that with wage growth and underlying inflation weaker than in other countries, the RBA can take more time to assess incoming data before making any policy changes. He added that “Given the outlook, though, it is plausible that the cash rate will be increased later this year.”

Yet RBA tightening expectations remain elevated. WIRP suggests around 65% odds of liftoff June 7 but is then fully priced for July 5. All told, the swaps market sees 150 bp of tightening over the next 12 months, followed by another 100 bp over the next 12 months that would see the policy rate peak near 2.75%.

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