Macroeconomics: The Day Ahead for 16 March

Today is all about the ECB meeting, with a relatively light data run outside of a raft of second division data in the US, with the first rise in China New Home Prices in 18 months and robust Australian labour data to digest, along with Credit Suisse’s decision to establish a CHF 50 Bln covered loan facility with the SNB, and to buy back $2.5 Bln and EUR 500 Mln of senior debt Ahead lie US weekly jobless claims, Import Prices, Philly Fed Manufacturing & NY Fed Services surveys, and Housing Starts. The events schedule has the as expected no change from Bank Indonesia to ponder, ahead of the UK OBR’s press briefing on its updated forecasts, with the International Grains Council publishing its monthly report, and govt bond supply taking the form of multi-maturity auctions in France and Spain, and 2-yr in Canada. There are corporate earnings in the energy & resource sector via way of Enel, Minas Gerais, Rusal. But all eyes will continue to be on the banking sector, with Credit Suisse’s woes reigniting fears of potential domino effects, and the scale of rates and other market volatility forcing margin calls, and a more fundamental and probably long overdue reassessment of banking and institutional portfolios, which per se will only contribute to further near-term volatility, as term risk premia on longer duration assets are belatedly re-established, and most visible in widening credit spreads, which will obviously have an impact on companies that need to refinance debt, especially those with weak balance sheets, above all the ‘zombie’ fraternity.

** Eurozone – ECB rate decision **

The consensus still looks for a 50 bps hike to 3.0% Depo and 3.50% Refi as has been heavily signalled, though markets are priced for a 75% probability of 25 bps after all the bank fear-related turmoil, though with the front end Euribor term structure in a mess, this tells us more about the volume of re-hedging, stop losses and short covering in recent days, rather than what markets are priced for (see attached chart).

The question then is what guidance is given for May, with markets now discounting a 40% chance of a 25 bps hike, while ECB hawks such as Austria’s Holzmann are already pressing for 50 bps hikes in May through July, which earnt him a stern rebuke from Italy’s Visco for not adhering to the ‘data dependent’ mantra, while chief economist Lane warned against policy being on ‘auto pilot’. A lot will depend on the forecast revisions, with 2023 headline CPI likely to be edged down, but more than offset by a sizeable upward revision to core for 2023 (Dec forecast 4.2%) and more modestly for 2024; but the 2025 forecast (last 2.4%) will be key in signal terms, with any downward revisions perhaps an acknowledgement that the prior sharp shift up in market rate expectations since the February and December meetings is in line with the ECB’s own expectations. There may be some tweaking of growth forecasts, which should be slightly higher. The question then will be how the statement and Lagarde’s describe risks to the CPI outlooks, more than likely adjusted as being to the ‘upside’ against February’s more balanced. But the broader and bigger issue for the ECB Council’s discussion is whether it has become alarmed by the scale of market volatility and whether it sees the SVB et al and Credit Suisse woes as a genuine systemic risk. The dilemma the ECB and all other central banks are facing is if the potential systemic risks force them to put the inflation fight on the backburner with, knowing full well that if they do go down that route, then they may struggle to resume the inflation fight, once perceived systemic risks ease.