Macroeconomics: The Day Ahead for 17 March

The BoE rate decision following on from the Fed yesterday, the “ECB and Its Watchers” conference and a relatively busy run of statistics top the ‘regular’ daily calendar , as the war in Ukraine continues to dominate. The data schedule has NZ Q4 GDP, Japanese Machinery Orders, Singapore Exports to digest ahead of US weekly Jobless Claims, Philly Fed Manufacturing survey, Industrial Production and Housing Starts. Outside of the BoE, there are also expected no change rate decisions in Indonesia, Taiwan and Turkey, while Hungary’s MNB is expected to bump up its 1-week Depo Rate a further 50 bps to 6.35%, and in the Agricultural commodities space, a close eye will be kept on the International Grains Council monthly report. While some more optimistic signals on the potential have emerged from the Ukraine Russia negotiations, two areas look likely to remain major obstacles to an agreement, firstly accepting the independence of the two Donbas regions and the Russian annexation of Crimea, and Russia accepting western protection (US, EU and Turkey) of Ukraine in exchange for Ukrainian quasi-neutrality (along the lines of Austria or Sweden).  Last but least, we note the story in the FT “Energy traders call for ’emergency’ central bank intervention” https://on.ft.com/3thO9Cw, with EFET (European Federation of Energy Traders) calling for ’emergency liquidity support’ from govts and central banks, and saying that it is ‘not unfeasible to foresee generally sound and healthy energy companies… unable to access cash.’ Unsurprising given the spectacular volatility in oil prices, but underlining this is creating shockwaves across commodities and energy sectors.

** U.S.A. – Post FOMC Thoughts **

– There were no major surprises in terms of the Fed’s statement, though as with Powell’s press conference, there was a lot of emphasis on underlying being strong (highly debatable when one looks at GDP forecasts of 2.2%, 2.0% and 2.0% for the next three years), and more than able to cope with the current projection of 6 further rate hikes this year, and a further 100 bps next year, which would take Fed Funds beyond the longer run ‘neutral’ rate, i.e. hawkish. The forecasts for PCE  were revised sharply for 2022: 4.3% vs. prior 2.6%; and more modestly 2023 2.7%, 2024 2.3%, with core PCE now seen in 2022 at 4.1% vs 2.7%; 2023 2.6%, 2024 2.3%. The labour market is seen tight for the next 3 years (3.5%, 3.6% & 3.6%) and below the longer run rate 4.0%, with Powell noting that the job market is “very, very tight… tight to an unhealthy level.” “Current Wage Gains Not Sustainable Over Longer Run”, but adding “we don’t see” wage gains becoming entrenched at a pace inconsistent with 2% inflation” and as with so much of the Fed messaging, all of this sounded as if the Fed is dining out on hope-ium. Critically the Fed is assuming that the participation rate will recover to its pre-pandemic level, as pandemic effects fade, but this looks to be a very unsound assumption, given workforce demographic shifts have been accelerated, and labour market participants’ preferences and expectations have also shifted. On balance sheet reduction, Powell effectively said a decision will be announced at the May meeting, and that the outline of their plan will be in the FOMC minutes in 3 weeks’ time. Markets initially saw a swoon in Eurodollar futures, bonds and equities, but regained their footing quickly, taking heart from Powell’s “bullishness” on the growth outlook, and his comment that the Fed would be sensitive to financial conditions, i.e. for markets a signal that the ‘Fed put’ is alive, even if the Fed ‘dot plot’ says something else, and he also stressed that “policy works through financial conditions. That’s how it reaches the real economy.” He also noted that bringing inflation down “may take longer than we like”, and placed particular emphasis on watching m/m changes in inflation (unsurprising). Markets are now pricing in a total of 75 bps of rate hikes in Q2, in other words assuming at least one 50 bps hike in May or June. In respect of financial conditions, it is worth noting that USD 3-mth LIBOR has risen for 5 straight days, while Tesla stands at the top of the list of companies pulling bond or leveraged loan issuance due to market volatility, and while key market spreads have stabilized somewhat, they remain considerably wider than they were at the end of February.

 # FOMC Statement: https://t.co/Fxnjce9qn8

 # FOMC economic projections:      https://www.federalreserve.gov/monetarypolicy/fomcprojtable20220316.htm

** U.K. – BoE Rate Decision **

– The consensus continues to see a 25 bps BoE rate hike this week, with markets also shifting back to pricing in a 25 bps hike today (having deferred it to May at the back end of last week), and are again factoring in a further 75 bps by June (see graphic attached). The latter appears overly aggressive given the array of uncertainties, and notwithstanding the stronger than expected monthly GDP, CPI and labour data. The BoE will probably acknowledge the stronger than expected recent data, but at the same time highlight that the fall-out from the war in Ukraine as adding to downside growth risks, but upside risks on inflation, which is likely to prompt some revisions to when the MPC expects inflation might pass its peak from the prior expectation of April. But it will likely stick with the view that the UK economy will slow sharply in 2023 & 2024. It will again stress that monetary policy is not purposed for dealing with supply side issues, above all energy related, and that current energy and commodity price volatility only makes it harder to formulate inflation forecasts. It will doubtless stick to the view that wage pressures are still primarily a function of a tight labour market, and may indeed point to the latest Average Earnings data as showing that basic pay pressures are rather more muted than pay including bonuses. Given that it distanced itself from forward guidance long before the Fed or ECB, and the fact there is even more uncertainty relative to its February meeting, it will be interesting to see how much (if any) pushback there is in the statement or minutes on current market rate expectations.