Macroeconomics: The Day Ahead for 5 May

EVENTS PREVIEW

While Russia appears to be dialling back on expectations of a major military offensive or a nuclear ‘tactical strike’ in the Ukraine ahead of Monday’s Victory Day holiday, it is probably best to assume that actions speak louder than words, and in the case of the Kremlin, rhetoric is very frequently strategically and purposefully deceptive. China’s battle with Covid and India’s scorching heatwave remain the other overarching factors, with today’s local elections in the UK adding to the array of political risks. The Conservative party are expected to lose around 800 seats in local council elections on Thursday, amidst a sea of sleaze, which seems likely to prompt a leadership challenge to PM Johnson, though a closer look at where elections are taking place suggests that the Conservatives have rather less to lose (having already lost so many council seats in 2018) than the media narrative implies.

But for markets, it is all about central banks, as the Fed and Brazil policy decisions are digested ahead of a further barrage of policy meetings in the UK, Norway, Czechia, Poland and Chile are awaited. The statistical schedule is busy, with China, India and UK Services PMIs, Germany Factory Orders, French Production, Turkish CPI &  PPI and US weekly jobless claims and Q1 Non-farm Productivity due. But all of these may well prove to be little more than roadkill given the array of central bank decisions and indeed speakers, with ECB’s Lane and Holzmann and BoC’s Schembri on tap. France and Spain both hold multi-tranche auctions of long-dated govt debt, while European banks and financials (Credit Agricole, Soc Gen, Swiss Re and Unicredit) feature heavily on a busy run of corporate earnings, which also has results from Anheuser-Busch InBev, ArcelorMittal, BMW, EDP, Henkel and Shell, while in the US Air Products & Chemicals, Conoco Philipps, Kellogg, Zillow and Zoetis are likely to be among the headline makers. In terms of the to be phased in EU oil sanctions on Russia, perhaps the more important aspect was the accompanying sanctions of financing and offering insurance on the transport of Russian oil or oil products, closing out a potential loophole of importing via a third country (though as has been seen with Iran, there are ways to circumvent this. Bear in mind what OPEC said yesterday, and this was not really self-serving, namely that there is no way that production elsewhere can compensate for the loss of Russian output. Someone will of course counter that OPEC does want to see a two-tier market evolve, which would see Russia offloading output at massive discounts to any willing buyers, which is of course true, but ignores the point that this is about output capacity, which remains severely constrained, due to the lack of upstream investment in the 2016-2020 period.

** U.S.A. – Post FOMC quick thoughts **

– As expected the Fed hiked rates by 50 bps, and confirmed that from June 1 it will start to reduce its balance sheet by an initial $47 Bln per month, rising over three months to a a peak pace of $95 Bln. That latter configuration was emblematic of the meeting as a whole, adopting an ‘aggressive’ policy stance, while at the same time pushing back somewhat on market pricing in an even more aggressive policy stance. Market reaction to the Fed policy decisions hinged effectively on three little words, namely Powell’s response to a question on whether a 75 bps rate hike might be forthcoming, to which he responded the this was something that the FOMC is ‘not actively considering’, and with that rates markets rallied, bond yields fell and equity markets raced higher, posting the sharpest single day gains in more than 20 years, a sure sign that the Fed underplayed its hand, that markets had overplayed theirs in the run up to the meeting, and above all that there remains too much central bank ‘largesse to excess’, and as always that market liquidity and price reaction function is broken. Was the Fed dovish? A 50 bps rate hike, a sharper kick-off to QT in volume terms, but slower in build-up confirm that the Fed was not as hawkish as had been discounted, but not dovish. 50 bps hikes in June and July would take the Fed Funds rate to 1.75/2.0%, and thereafter the question is how do markets react to the simultaneous withdrawal of liquidity by the array of developed world central banks, and a rate on ultra-defensive rates (‘safe’) assets that removes a good deal of TINA and FOMO pressure.

– FOMC statement: https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.federalreserve.gov%2Fnewsevents%2Fpressreleases%2Fmonetary20220504a.htm&data=05%7C01%7CSimrat.Sounthe%40admisi.com%7C7814810218034eee70d708da2e4e20cb%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637873210630844111%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=VZ3zqa5DZ8IOi6bAO%2Fynw6HcMnPPcmfMafrd7U5EOmo%3D&reserved=0

– QT plan: https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.federalreserve.gov%2Fnewsevents%2Fpressreleases%2Fmonetary20220504b.htm&data=05%7C01%7CSimrat.Sounthe%40admisi.com%7C7814810218034eee70d708da2e4e20cb%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637873210630844111%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=Zx8mIuzuJc2b19eVRrtR46cOvu7S9FKS5qNB5MR2Hms%3D&reserved=0

– Powell press conference: https://nam02.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.federalreserve.gov%2Fmonetarypolicy%2Ffomcpresconf20220504.htm&data=05%7C01%7CSimrat.Sounthe%40admisi.com%7C7814810218034eee70d708da2e4e20cb%7C2f55bf3242d444b3a8c2930ac8b182b2%7C0%7C0%7C637873210630844111%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=9XzvhNvHcbnuTAitZdK0oZ24lLMK23mwCcG4UyJcupQ%3D&reserved=0

** U.K. – BoE MPC decision **

The Bank of England is expected to opt for a 25 bps hike to 1.0%, with March CPI already at 6.2% y/y and more ominously core CPI at 5.7%, even before the sharp rise in utility prices and council tax hits in the April data, and leaving the MPC no wiggle room on rates, regardless of saying in March that further rate hikes ‘may be’ appropriate. The 1.0% Base Rate level has been previously identified by the MPC as the level at which it will consider active sales of Gilts to reduce the size of its balance sheet, and it is expected to outline its plans on that front, with the consensus suggesting it would start sales in Q4 at a pace of £5.0 Bln/mth. But it will be its updated forecasts that use market implied rates as its base assumption, with the CPI forecast in February already assuming inflation would undershoot on a 3-yr time horizon at 1.6%, but at the time markets assumed a peak in Base Rate of 1.5%, and are now discounting 2.75%, which suggests that the updated forecasts should be looking at an even bigger undershoot (say 1.0%?). February’s forecasts also assumed that growth would slow sharply to 1.8% in Q1 2023 and 1.1% in 2024 and 0.9% in 2025, these are likely to be revised lower, and Unemployment estimates revised higher. It will likely be even more cautious on the outlook for further rate hikes, particularly given an array of data pointing to heightened recession risks, perhaps above all the plunge in Consumer Confidence, the slide in CBI Business Optimism and a sharp rise in insolvencies.

** Norway, Poland & Czechia rate decisions ** Elsewhere Norges Bank is seen on hold at 0.75%, but sticking to its rate hike trajectory, with governor Wolden Bache last week noting the strength of economic activity, limited spare capacity and ‘prospects for rising wage growth”, but adding that wage growth would have to accelerate a lot faster to prompt a steeper rate trajectory. Poland’s NBP is now paying a high price for its unwillingness to counter obvious inflationary pressures in H1 2021, with Friday’s CPI data coming in even higher than expected at a whopping 12.3% y/y, and cementing expectations of a further very aggressive 100 bps hike to 5.5%, which would still leave well behind the curve. While the influx of nearly 3.0 Mln refugees from the Ukraine is clearly straining every capacity constraint in Poland, and adding to inflationary pressures, it is not the primary driver. The more worrying aspect is that with the Polish government adding to regulatory cost pressures for Polish banks via way of a ‘supplementary’ depository guarantee fund, on top of the already very burdensome existing fund, (currently 1.8% of guaranteed deposits vs. an EU requirement of 0.8%), the rapid rise in rates will likely result in a sharp rise in loan loss provisions, and a further hit to sector profits. While Czechia’s CNB has been somewhat more proactive in terms of hiking rates, the latest CPI data (12.7% y/y vs. Feb 11.1%) and a solid 0.7% q/q for Q1 GDP predicate expectations of another 50 bps hike 5.5%, despite some CNB board members favouring 25bps, and in one case no change, and it is unlikely that it will be in a position to signal a pause on rate.

** Chile – BCC rate decision **

In Latin America, Chile’s central bank is seen hiking rates a further 100 bps to 8.0%, slowing the pace of its tightening following two consecutive 150 bps hikes, but still double the 50 bps the BCC was expecting in March. But with March CPI jumping sharply to 9.4% y/y from February’s 7.8%, with a further jump to 10.1% seen for April (data tomorrow), it will also likely signal further policy tightening, in contrast to March when it anticipated that one further 50 bps would be sufficient before pausing.

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Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2021 ADM Investor Services International Limited.

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