Macroeconomics: The Week Ahead: 4 April to 8 April

The Week Ahead – Preview: 

The horrific images from Bucha in Ukraine and the intensification of the Russian assault on eastern and southern regions of the Ukraine serve to remind that a ceasefire, let alone peace, remains a distant prospect. The scale of depravity and destruction is now as big a hurdle to a peace treaty, as Ukraine’s territorial integrity, given that while compromise is a necessary if often very unsavoury part of any peace settlement, it simply cannot let such barbarity be effectively ‘rewarded’ or go unpunished. Any such peace will therefore be only an end to outright military conflict, but far from a conclusion to the fall-out and aftermath, even if financial markets will doubtless start to turn their focus elsewhere. In immediate terms the focus is not really on the prospect that has been raised of direct negotiations between Zelenskiy and Putin, but rather whether the EU halts imports of Russian oil and gas, and/or Russia cuts off supplies thereof due to its insistence on payment in Roubles, in both cases with very immediate consequences for energy and power supplies and a very sharp economic impact in Europe, with quasi-rationing having already been introduced in France due to the latest bout of cold weather in Europe, at a time when nuclear power output is impaired due to overdue maintenance closures.

– As previously observed, incoming statistics are to a large extent moot, as they will offer little insight into the impact of the war in Ukraine, above all in Europe and the MENA region, or the disruption to China’s economy and trade from Covid-19 lockdowns, as it continues to stick largely to a Zero Covid policy (it will also be on holiday for the first two days of the week). As such, high frequency data remain the focal point, along with a likely rush of growth forecast downgrades from govts, industry bodies and think tanks, above all in Europe. The calendar of data is in any case rather short of first division data, above all in the US (Factory Orders, Trade Balance, Consumer Credit) and China (FX Reserves), with German Orders, Production and Trade, Japan wages, Household Spending and Economy Watchers Survey, Canada’s labour data and Q1 BoC Business Outlook survey, Turkey’s CPI (forecast hot hit 61.5% h/y headline and 47.1% core) and Eurozone Sentix survey providing the accompaniment to the run of Services PMIs/ISM on Tuesday. The latter are expected as ever to see no changes from flash readings, though the risk of downward revisions in the Eurozone and perhaps UK looks to be substantial, and China’s Caixin Services PMI may also undershoot forecasts of a modest dip to 49.8 from 50.2.

– On the central bank front, there are the minutes / account of the Fed and ECB meetings, though inflation data and other events have overtaken them to some extent. The FOMC minutes will offer further details on how it proposes to run down its balance sheet, which is likely to outline a number of possible options in terms of the pace of QT (quantitative tightening), though an initial $20/25 Bln, increasing month by month by a similar amount to a cap of $100 bln/month appears to be the consensus, with a final decision to be made at the May meeting. It will probably indicate that outright sales of Fed Treasury and MBS holdings is not envisaged, but could be an option if required. The minutes will confirm that a rate hike at every meeting this year is expected by all FOMC members, though opinions differ on how many 50 bps hikes may be required/appropriate. Brainard’s speech on Tuesday takes top billing among this week’s run of Fed speakers.

  The ‘account’ of the ECB meeting should offer some insights into why the statement changed the wording on the timing of an initial rate hike from ‘soon after’ to ‘some time after’ the end of QE, while at the same time sharply accelerating the QE taper, even if last week’s CPI surge may well have altered the opinions of the most diehard doves. It should also shed some light on any possible pivot back to focussing on weaker prospective growth and labour demand, and the extent to which the council believes that fiscal policy and other legislative measures are / will be critical to energy (and to a lesser extent food) price pressures.

  The RBA is expected to hold rates at 0.10% when it meets on Tuesday, and stick to the view that rates may start to rise in H2. Of particular interest will be its assessment of the pre-election budget, both in respect of the temporary cut fuel tax impact on the inflation outlook, and other measures taken to cushion households from higher energy prices and the impact of the war in Ukraine, and how this may or may not lead to changes its inflation forecasts. The RBA also publishes its half yearly Financial Stability on Friday, with the focus above all on the Housing sector, given that mortgage approvals continue to surge, despite some signs that house price inflation is peaking.

  India’s RBI policy meeting rounds off the week on the central bank front, with the RBI expected to hold policy rates again (Repo 4.0%, Reverse repo 3.35%), and emphasizing risks to the growth outlook over inflation pressures. It is however likely to shift its guidance to indicated less accommodation going forward, particularly given that Covid-19 restrictions have been removed. Elsewhere Poland’s NBP is expected to hike rates 50 bps to 4.0%, though with March CPI surging to 10.9% y/y from 9.8%, a more aggressive move cannot be ruled out; while Peru’s BCP is seen hiking 50 bps to 4.50%, sticking rigidly to the same pace since it first started tightening policy in September.

– Politically, outside of the war in Ukraine, the US House sub-committee hearing on gasoline prices, at which senior executives from oil majors will testify, will be in the spotlight. France holds the first round of its presidential elections on Sunday, with Macron still holding a considerable lead over Le Pen, even if recent polls suggest some narrowing, but he is still expected to win the second round comfortably. There will also be the results of the Hungarian general election and Serbia’s presidential election to consider.

– Commodity and energy markets remain inordinately volatile, with the Ukraine war compounding already tight supply in energy and some metals markets, and a good deal of weather related uncertainty in the agricultural space, along with considerable uncertainty about Chinese demand, both due to a weak economy and the intermittent and frequent disruptions, due to its Zero Covid policy. The focal points for the week beyond what happens with Russian energy supplies, will be the USDA’s World Agricultural Supply and Demand (WASDE) report, and its equivalent CASDE report from China’s Agriculture Ministry, along with weekly EIA inventory and production reports for oil and gas, and what oil SPR volumes other IEA countries will release after agreeing to join the US move on Friday. Saudi Arabia’s Aramco is also due to publish its selling prices for May, with the focus on the size of the Arab Light grade premiums above all given the hefty discounts being offered on Russian oil, while the UN’s FAO World Food Price index is likely to jump to a fresh record. Against the backdrop of immediate supply issues and accompanying price surges forcing governments to ride roughshod over Climate Change and Energy Transition policies, the UN’s IPCC Intergovernmental Panel on Climate Change will publish its latest report.

– It will be a very light week for earnings with only four S&P 500 companies reporting, with Bloomberg News suggesting the following will be among the highlights: Bank of Ningbo, Constellation Brands, Sberbank of Russia, Seven & I, Will Semiconductor Shanghai. The narrative around equities (and credit) appears to be rather self-serving, with the high volume of announced corporate share buybacks, the very historical aspect of low default rates, and many also noting that while Q1 earnings growth will slow sharply due to adverse base effects and ostensibly strong pricing power to combat input price pressures, the bar in terms of EPS and Revenue expectations has been set very low (relative to end December, estimates for Q1 have been revised down to 4.7% from 5.7%), i.e. suggesting that many companies may report better than expected results. Omitted from that perspective are that the earnings growth forecast consensus (if correct) would be the lowest since Q4 2020, that guidance has thus far seen 67 S&P 500 companies issue negative guidance and 29 positive, and that the forward 12-mth P/E ratio stands at 19.6 against a long-run average of 16.8. (Statistics source: Factset)

– The govt bond auction schedule outside of Europe is light, with no coupon supply in the US, while the U.K. sells 4-yr, France 10, 16 & 50-yr, Spain 5, 7 & 10-yr & I-L 11-yr, Germany I-L 8 & 24-yr and Austria 10 & 25-yr. The focus remains on credit markets after a big rebound in March issuance, though an overall subdued quarter for corporate debt sales due to the immense volatility, with IG and HY credit spreads tightening sharply at the end of the quarter from the highs seen at the time of Russia’s invasion of Ukraine.